A The Motley Fool article points out American Axle & Manufacturing's (NYSE: AXL) hypocrisy in pushing huge pay cuts on workers while giving management huge bonuses, not to mention these bonuses may have been partially bankrolled by General Motors (NYSE: GM):

American Axle & Manufacturing ended a strike by persuading workers to accept a contract that includes significant pay cuts. A month later, management announced its decision to give bonuses to executives, including a multimillion-dollar award for the CEO.

The parts supplier whose strike caused its largest customer, General Motors, to idle around 30 plants because of parts shortages, filed a notice with the SEC on Friday that it had granted lavish bonuses to its top executives, including $8.5 million for CEO Richard Dauch.

In contrast, the contract the workers got stuck with includes cuts that slashed most of their wages from $28 an hour to somewhere between $14.35 to $18.50. One of the primary reasons the deal got done was because GM kicked in $18 million on top of the $200 million it was contributing for buyouts and such.

From the Centre Daily Times, on The Conference Board's look at 2007 executive compensation:

According to The Conference Board study, the utilities industry and the food and tobacco industry top the list of median CEO compensation. The highest median CEO total compensation was $3.9 million for the utilities industry and $3.8 million for the food and tobacco industry. Because of the broad-brush classification that includes many smaller "commercial banks" along with the larger banks and "nonbanking financial services" companies, the ranking of financial services is at the bottom of the median CEO compensation list with $734,000. While on average larger companies pay higher salaries, the fraction of total compensation that is delivered by base salary is lower as companies get larger. The smallest 10 percent of companies deliver 57 percent of their total compensation in salary, whereas the largest 10 percent of companies deliver only 12.5 percent as salary.

The New York Supreme Court threw out four chargers against former New York Stock Exchange Chairman Dick Grasso, who made headlines in 2003 for his $190 million pay package. The Washington Post reports:

[Attorney General] Spitzer brought suit in 2004, a year after Grasso was removed from his post, claiming that the compensation package was exorbitant for the executive of a not-for-profit corporation. According to court documents, Spitzer contended that the compensation was not justified by the work performed by Grasso and therefore a violation of the Not-For-Profit Corporation Law. The suit also alleged that Grasso handpicked the NYSE board members who decided his package and they had ignored the board's system for calculating compensation.

The four claims against Grasso that have been tossed out were not based on specific state laws, but Spitzer argued that as attorney general he had the right under common law to act in the public interest. By contrast, the two remaining charges are based on state statutes regarding unlawful transfer of corporate assets and breach of fiduciary duty.

"It's more complex in the sense that they have to prove more than they otherwise might," said Richard Schulman, counsel at Bryan Cave who specializes in securities and business fraud litigation.

The Albany court's decision yesterday is being viewed by some legal and financial experts as a blow to attempts to rein in executive compensation.

"I think that this ruling clearly indicates that a court is going to be very skeptical in overruling an internal compliance committee in their determination so far as what is fair and reasonable compensation," said Steven Caruso, a partner at Maddox Hargett & Caruso.

An article from DowJones Online Financial News reports that investment bank CEO pay fell 43% last year - good news for those concerned about pay for performance given that it was a rough year for many investment bank shares. However, even after that 43% drop, pay averaged a staggering $27 million.

Interestingly, some executives at firms were paid more than their CEOs, such as two Goldman Sachs Group (NYSE: GS) co-presidents who earned more than $71 million compared to CEO Lloyd Blankfein's paltry $70.3 million.

From a The New York Times' article "How Big a Payday for the Pay Consultants?":

Compensation consultant biases can arise when a company’s board uses the same consulting firm for pay design as well as other services such as human resources management and outsourcing advice. Because the fees earned by consultants for compensation work are far less than what they make on other business, there is a risk that compensation gurus will put together cushy pay packages in order to snare more lucrative gigs elsewhere in the corporate empire.

Here’s an easy fix: Require companies to detail in proxy statements all fees paid to consultants they hire, for compensation design and all other services.

When the Securities and Exchange Commission rewrote the laws on executive compensation disclosure last year, it didn’t require public companies to detail consultants’ fees. This was a mystifying mistake.

A WSJ article titled "Firms Measure a CEO's (Net) Worth" examines the admittedly uncommon, but perhaps growing, practice of company boards taking stock of how much they have paid a CEO over his or her entire tenure when setting pay:

Last year, directors of fund manager Waddell & Reed Financial Inc. looked at the roughly $70 million Chief Executive Henry Herrmann had collected in stock, pension benefits and deferred compensation over his 36-year career, and deemed it "sufficient" for retirement, according to its proxy statement. The board stopped extra contributions to Mr. Herrmann's retirement fund.

Waddell & Reed is among a growing number of companies scrutinizing how much they have paid executives over time. Nearly 15% of Fortune 500 firms said they took such "accumulated wealth" into account in setting 2007 executive pay, up from 8.4% in 2006, according to data tracker Equilar Inc. Part of the increase is due to the Securities and Exchange Commission, which is encouraging companies to disclose the role of historical pay in their compensation decisions. Few acknowledge reducing CEO pay or benefits, as Waddell & Reed did.

Sony Corporation (NYSE: SNE) shareholders rejected a proposal during its annual shareholder meeting regarding executive compensation.

No, they didn't vote down an advisory 'say-on-pay' proposal, they literally voted to not know how much individual executives are compensated.

Only 39.7% of shareholders voted in favor of Sony disclosing the individual pay of top management, rather than aggregate pay as is currently done. Sony CEO Howard Stringer, who has captained Sony through its most recent series of blunders, not surprisingly was against the proposal.

The climate surrounding executive compensation is clearly calmer in Japan right now, but how far the vote came from reaching the two-thirds majority needed is shameful given Sony's loss of market share in key sectors combined with loss of its innovative edge over the last 3 years.

Here is BloggingStocks' take on whether "macroeconomic woes" should affect CEO pay:

On one level, criticizing rising executive pay based on the performance of the economy is grossly unfair: executives should be paid based on their marginal value to the company, not based on broader economic trends that they have no control over. The problem is that executives routinely benefit from factors they have no control over: any CEO of any oil company is doing quite well just for being in the game. When things are going well, everyone's happy, and shareholders generally don't complain about CEO pay when they're earning double-digit returns. But when CEOs don't take a hit with the shareholders on the way down, it's not fair. CEOs are in the ideal "Heads I win, tails it wasn't my fault and I still win" situation.

Right now, companies can be run by small clique of insiders who have virtually no stake in the company's long-term future -- and decades can go by without any accountability. Until that changes, executive compensation in America will continue to be a disaster.

Not surprisingly, a soon to be published academic paper shows that independent boards lead to a stronger link between CEO pay and company performance:

“In this paper, I find that the independence requirement imposed on boards of directors by the Sarbanes-Oxley Act of 2002, together with the governance regulations subsequently introduced by stock exchanges, affects CEO pay structure,” explains the paper’s author Teodora Paligorova, in its abstract.

“In firms whose corporate boards were originally less independent, and thus more affected by these provisions, CEO pay for performance strengthened while pay for luck decreased after adopting SOX,” it finds. “In contrast, those firms that exhibited strong board independence prior to SOX showed little evidence of pay for luck and little change in pay for performance following the adoption of SOX.”

The results are consistent with the rent-extraction hypothesis -- which suggests that weak corporate governance allows entrenched CEOs to capture the pay-setting process -- it adds.

The Associated Press looks at politicians' use of 'say on pay' as a cudgel:

Sen. Barack Obama, the presumptive Democratic nominee, has proposed writing the concept, known as "say on pay," into law. Republican Sen. John McCain wants to encourage companies to give shareholders a say but without legislating the idea.

The McCain approach is similar to what President Bush has done — jawboning corporate America over extravagant pay packages but opposing "say on pay" legislation.

Executive pay rings a strong populist tone on Capitol Hill and the campaign trail, especially when the economy is stumbling and stocks are falling.

"Say on pay" legislation cleared the House last year by a 2-to-1 margin but has gone nowhere in the Senate. It has been opposed by the White House and most Republicans.

The legislation won't necessarily become law, though. Populist rhetoric and bold legislative proposals play well, but enacting laws to change corporate governance is another matter.

The say-on-pay legislation "could be a catalyst," said Amy Borrus, deputy director of the Council of Institutional Investors, a group representing public pension funds. If the Senate Banking Committee were to take up a proposal, that could "get more companies to take the issue seriously and act on it," she said.

From The Associated Press:

THE 'HOUSING CRISIS HITS HOME' AWARD: Qwest Communications International Inc. (NYSE: Q) - It may be in the telecommunications business, but it hasn't escaped the housing market downturn. Bought a house for its new CEO last summer, ultimately sold the house and lost $1.83 million on the episode.

THE 'LET'S GO SHOPPING' AWARD: Macy's Inc. (NYSE: M) gives its top brass an additional discount on top of the discount that the rest of its employees get. That totals 40 percent off the retail price. There's more: The Cincinnati-based department store chain also picks up the taxes on that extra discount because it's considered taxable income.

THE 'YOUR PAY IS BASED ON WHAT?' AWARD: To companies that trumpet the idea of "pay for performance" but then don't give investors the detail they deserve in knowing what that means.

A study by compensation consulting firm James F. Reda & Associates of about 300 large public companies found that just 16 percent were thorough in spelling out exactly how pay supposedly tied to the company's annual performance was measured — and how much was actually paid. Another 19 percent provided no detail at all.

The Motley Fool examines CEO pay from a unique angle by calculating, based on your percentage ownership stake in the company, how much you contributed to the compensation:

"Clif P. of Hawaii was comparing his ownership of Berkshire Hathaway (NYSE: BRK.A) and Countrywide Financial (NYSE: CFC). He explained that, considering his total shares owned:

'I now own almost exactly one millionth of Berkshire. This makes my share of [CEO Warren Buffett's $100,000] salary $0.10. ... In contrast, I own [about] 1/110,000 of Countrywide. Countrywide's CEO [Angelo Mozilo's] compensation for 2007 was recently reported as being $22 million. This means I forked over $200 for his management.'

He noted how tempted he was to go to the Countrywide annual meeting and ask why Mozilo was worth 2,000 times more than Buffett.

It's an interesting way to view an investment, no? But it certainly has its limitations."

J. Edward Ketz, an accounting professor at The Pennsylvania State University and author of Hidden Financial Risk, has been featured here before for his articles at SmartPros. His most recent piece offers substantive measures for Congress to take to curb CEO pay, rather than just pandering:

"The first thing to do is to separate the position of chairman of the board from the CEO position. The board should represent the shareholders and, as such, it ought to supervise and control the activities and the proposals of managers. The board cannot function very effectively for these purposes if the board is populated with the top executives. As the British have learned, there are important benefits to separating these functions, including better oversight by the board of directors.

The second thing to do is to empower shareholders to vote. It is shameful for managers to prevent votes to take place on important issues, including but not limited to, compensation. But I would not take the toothless position of having these votes nonbinding. After all, these are the shareholders -- the owners of the corporation! Surely in a capitalistic society such as ours the owners of the firm or their agents can have a say in how the business is run.

The SEC had several chances during recent years to empower owners to regain control over their firms, but instead the SEC fumbled the ball. It wouldn't hurt for Congress to question Christopher Cox and ask him why the commission's recent decisions favor managers over shareholders. I thought the purpose of the SEC was to represent and protect the interests of shareholders."

Because 'golden parachutes' were not enough, a WSJ story reported on another way to absurdly pay CEOs, even if they are dead:

"For instance, Nabors Industries (NYSE: NBR) would owe the estate of CEO Eugene Isenberg a "severance" payment of at least $263.6 million, which is more than the first-quarter earnings at the Houston oil-service company, the Journal said.

Compensation critics call the practice the ultimate in pay that is not based on performance.

Death benefits are not a new feature of executive contracts, but a federal rule change 18 months ago that forced companies to provide more detail on severance arrangements has exposed just how lavish some of these arrangements are, the Journal said.

It said the CEO of Shaw Group Inc (NYSE: SGR) is in line to be paid $17 million for not competing with the engineering and construction company after he dies."

According to a Reuters story, presumptive Republican Presidential nominee Senator John McCain would make say-on-pay shareholder votes mandatory if elected:

"Americans are right to be offended when the extravagant salaries and severance deals of CEOs ... bear no relation to the success of the company or the wishes of shareholders," he says, adding that some of those chief executives helped bring on the country's housing crisis and market troubles.

"If I am elected president, I intend to see that wrongdoing of this kind is called to account by federal prosecutors. And under my reforms, all aspects of a CEO's pay, including any severance arrangements, must be approved by shareholders," he says.

From a Matthew Daneman piece in The Rochester Democrat and Chronicle:

Being the head of a major company often comes with rewards beyond a nice paycheck and oodles of stock.

As part of his 2007 compensation, Eastman Kodak (NYSE: EK) CEO Antonio Perez received $7,000 worth of financial counseling, $24,723 for a security system and personal use of Kodak aircraft valued at $340,007, according to the company's proxy statement.

Securities and Exchange Commission filings by other companies showed 2007 perks including:

• $135,725 moving expense reimbursement for Stephen S. Romaine, CEO of Ithaca-based Tompkins Financial Corp.
• $19,578 to cover taxes for Carl E. Sassano of Transcat Inc. in Ogden, a distributor of calibration equipment.
• $64,825 in perks, including club membership dues, meals and the cost of a Buffalo apartment for M&T Bank CEO Robert G. Wilmers.
• $1,250 clothing allowance for Homi B. Patel, CEO of Hickey Freeman's parent company, Hartmarx Corp.

Not surprisingly, in this selection from a Reuters piece on a new industry group fighting for CEO pay status quo, the group reveals its true colors: the average stockholder (meaning the average owner of the company) couldn't possibly understand the complicated reasons why a CEO needs to be paid an outrageous sum of money - hence say-on-pay is bad for business and bad for America:

With business leaders facing rising scrutiny from shareholders and lawmakers about their compensation, a new organization wants to tell corporate America's side of the executive pay story.

Leaders of the Center on Executive Compensation, an industry-backed group based in Washington, say they want to offer a reasoned view about how to create good pay practices.

The center says its mission is not to blindly defend CEO payouts that have angered investors, but to strengthen the links between pay and performance industrywide while ensuring companies remain competitive.

The media has "rightly" put the spotlight on instances of excessive CEO pay, "but our concern is that paints a picture of corporate America in total," said Richard Floersch, the center's chairman.

"For the vast majority of companies, they are dedicated to a very strong executive compensation program with very strong principles around pay for performance," he said. "Unfortunately, that story doesn't come out when you do have some of these outlier situations."

Activist investors have lashed out over executive payouts they consider too lavish, while members of Congress have publicly scolded some corporate chiefs for receiving outsized pay packages at a time when their companies have been hard hit by the U.S. mortgage crisis.

CEOs themselves play no direct role at the new center, an offshoot of the HR Policy Association, which represents human resources officers at big U.S. companies.

The center has a 16-member advisory board made up of chief HR officials at companies such as American Airlines (NYSE: AMR), International Business Machines (NYSE: IBM)) and Lockheed Martin Corp (NYSE: LMT).

Shareholder rights activists say they do not have high hopes that the executive compensation center will advocate for investors.

"This is part of the effort of the business community to protect the status quo from angry shareholders and a concerned Congress," said Richard Ferlauto, director of pension and benefit policy at the American Federation of State, County and Municipal Employees (AFSCME), a frequent critic of executive pay plans.

"It just shows that the business community is mobilizing, rather than reforming pay," he said.

The executive compensation center opposes the "say-on-pay" investor proposals and a bill pending in Congress calling for a mandatory shareholder vote on executive pay, saying they could end up forcing companies to adopt "cookie-cutter" pay plans aimed at winning shareholder support rather than be in the corporations' best strategic interests.

"There are a lot of unintended consequences and negative consequences from adopting a shareholder vote," said Charles Tharp, the center's executive vice president for policy.

From an Anne Moore Odell piece on SocialFunds.com:

This year over 90 companies have faced, or are going to face, shareholder resolutions on "say on pay." The resolutions were filed by a broad coalition of 75 plus investors managing over $1 trillion in assets. Walden Asset Management, one of the lead filers of these resolutions, reports that of the proposals that have faced voters this year, a majority have received at least 40% approval with six proposals reaching over 50%.

"The advisory vote on executive compensation would help insure that corporate boards, specifically the compensation committees, do a better job at explaining to shareholders how executive pay is linked to performance," said Brother Steven O'Neil, shareholder action coordinator for the Marianist Province of the United States.

"Even if the shareholder vote is advisory, the board would have a lot of explaining to do if they implemented a pay plan that the majority of shareholders were against," explained O'Neil. The Marianists were the primary filer on "say on pay" resolutions at Capital One and Oracle. They were co-filers at Exxon-Mobil.

The 2008 proxy season has seen a 50% increase in the number of "say on pay" resolutions from 2007, jumping from over 60 resolutions in 2007 to over 90 in 2008. The first "say on pay" resolution was filed by the AFSCME Employees Pension Plan in 2006.

RiskMetrics Group reports in it Midseason Review of the proxy season that executive pay vote proposals have averaged 43.1% support over 35 meetings where preliminary or final results are known. This compares to 42.5% support of these proposals in 2007.

"Under new SEC rules, companies have to disclose the total compensation of their top officers," explained Tim Brennan, treasurer and vice president of finance for the Unitarian Universalist Association. "In the past, much of this information had been buried in the annual filings."

"Now, what can investors do with this information? The most effective and efficient way for shareholders to communicate whether company management, their agents, are being fairly compensated is to have a vote at the annual meeting. This is also a great way for boards to get a reading on the judgment of the shareholders, whom they represent," Brennan continued.

Aflac became this first company to support an advisory vote on executive pay. Shareholders overwhelming supported the issue, voting 93% for the measure.

"I think that the fear of the proposals on the part of the companies is largely unfounded, at least for those with rigorous and fair compensation systems," said Brennan. "Witness the vote at Aflac, the first company to conduct such a vote. Management compensation received approval from over 90% of the shareholders. That's a great vote of confidence for the company and the board."

Other companies that have adopted policies regarding advisory votes on compensation include Blockbuster, Verizon, RiskMetrics, and Par Pharmaceuticals.

As of the end of May, the 2008 "say on pay" resolutions votes that received a majority, some of which are preliminary, include Apple Computer (51%), Alaska Air (53%), Lexmark (60%), PG&E (52%), Motorola (54%), and South Financial Group (52%).

Other results on "say on pay" include Bank of New York Mellon, (46%), Bank of America (45%), Citigroup (42%), Dresser Rand (46%), Dupont (45%), Edison International (47%), Boeing (46%), Goldman Sachs (46%), IBM (43%), Johnson & Johnson (45%), Lockheed Martin (46%), Occidental Petroleum (45%), Merck (48%), PepsiCo (44%), and Waddell & Reed Financial (49.5%).

RiskMetrics notes that as of May 23, no "say on pay" proposal has received less than 30% support.

From The Motley Fool's Alyce Lomax piece "Bad News in CEO Pay":

Many newspaper companies' CEOs actually got raises in 2007, even though a dozen newspaper companies he surveyed saw their share prices decrease by an average of 35.7%. (Granted, CEO pay in the group did decrease by 11.7% on average, but you wouldn't know it from some of the figures.) Check out some examples:

    * News Corp.'s (NYSE: NWS) Rupert Murdoch got a whopping total payout of $32.1 million in 2007. That was a 24% increase over the prior year, even though News Corp.'s shares lost about 8%.
    * Here's a piece of news that might be more at home in a scandal sheet: Journal Register's former CEO Robert Jelenic enjoyed a 333.2% pay increase to $6.3 million, even though the company's shares shed three-fourths of their value. (He's gone now, so his pay included severance; Journal Register now trades on the Pink Sheets. Ouch.)

Situations like these tend to deflate the customary arguments that CEOs should make mad money. Some people argue that exorbitant pay for CEOs reflects the high degree of risk these individuals assume. I'm sorry -- risk?

We've all seen CEOs do an indisputably lousy job, then walk away filthy rich. They often get high-profile gigs elsewhere, too -- look at Home Depot's (NYSE: HD) former CEO, Bob Nardelli, who went on to Chrysler. And what about Merrill Lynch's (NYSE: MER) former CEO, Stan O'Neal? He almost immediately joined Alcoa's (NYSE: AA) board of directors after leaving Merrill. Sure, everybody makes mistakes, but given their rich rewards for underperformance, we can't exactly call these folks' positions "risky." And there seems to be little (if any) shame in accepting tons of money for public failure.

On the bright side, Mutter pointed out a couple of newspaper companies on the other side of the spectrum, where stock performance and CEO pay more closely matched reality last year:

    * Washington Post's (NYSE: WPO) Donald Graham's compensation fell 52.4% to just $411,700; the company's shares fell 17.9%.
    * Scripps' (NYSE: SSP) CEO Kenneth Lowe's pay also dropped even more precipitously than his company's stock price. He took a 20.3% pay cut to $7.9 million, while Scripps shares fell 9.9%.

Mutter called Washington Post and Scripps "two of the most diversified and progressive companies in the publishing industry," and pointed out that their compensation policies are obviously set up to penalize the company leaders for not attaining tough goals. These CEOs took a hit to their wallets even though their companies' shares actually did better than many others in the industry.

Call me crazy, but that sounds like a common-sense policy for all corporations to me. "Our company's not as much of a loser as our peers, and that makes us a winner -- so pay up!" doesn't strike me as a path to greatness.

General Motors (NYSE: GM) executives took some heat during their latest annual shareholders meeting. Investors blasted executives for raking in huge salaries and bonuses while the automaker has continued to struggle financially. However, yet another say on pay proposal was defeated by apathetic institutional investors. The fear on their end is that shareholders may be too harsh and the measure would result in an exodus of executives.

Many shareholders believe that GM's market share, stock price and credit rating have all decreased in recent years, but the management and directors have not been held accountable. Employees have also felt the pressure with more than 10,000 jobs set to be cut in Canada, the United States and Mexico. According to one investor, "We either need to change this company or have the Japanese come in and run the whole place."

GM suffered a $38 billion loss in 2007 and the auto market continues to struggle in 2008. While many of the circumstances surrounding this decline is market and not company related, many investors still believe that executives should share in the pain. However, those supporting executive maintain that many own a substantial amount of stock and therefore are already sharing in the pain.

In the end, this is another example of shareholders disagreeing with management and the board. Executive compensation may remain a hot-button issue, but it clearly still isn't being resolved as long as public fights like these occur.

An excerpt from a Jon Talton piece in the Seattle Times:

Even back in the 1980s, shareholder activists and academics urged companies to separate the jobs of chief executive and chairman, as well as to have more independent directors.

The CEO is the top manager. But the chairman of the board should represent the larger interests of shareholders. He or she ideally is an independent director and can act as a check on the chief executive.

An independent chairman, for example, might have stopped Thompson from risking Wachovia's (NYSE: WB) future by acquiring mortgage lender Golden West Financial in 2006, when the signs of a housing and credit bubble were already abundant.

Yet America spent the 1990s worshipping at the altar of the imperial CEO, who held the title chairman as well, as if by divine right. CEO pay began its rise to imperial levels, no matter the company's performance.

The model here was Jack Welch at General Electric (NYSE: GE). Rubber-stamp boards became the norm. These corporate celebrities wrote books that not only promised to unlock the secret of business success, but even personal enlightenment.

Of course, it's easy to be a genius in a bull market. When scandal and corporate missteps brought on the 2001 recession, the centralized corporate-leadership model showed its worst weaknesses.

Enron, WorldCom, HealthSouth, Tyco International and others lacked independent chairmen and boards.

Congress passed reforms focused on the bookkeeping, but few companies emerged into the 2000s with independent chairmen, or even independent judgment.

The problem is all-powerful CEOs don't always act in the best interests of shareholders. This is on display with the disconnect between CEO compensation and performance.

Nor do imperial CEOs always act for the long-term health of their companies. This was the point of last week's unsuccessful effort to split the chairman and CEO jobs at Exxon Mobil (NYSE: XOM).

Dissident shareholders, including the Rockefellers, argued that the current imperial CEO refused to invest enough in alternative energy.

Exxon, of course, is awash in profits.

Facing a shareholder revolt of no small power, [Wachovia has] the opportunity to break the imperial model, split the jobs and bring independent judgment to the toughest calls.

What a concept.

Thomas Noe, Ernest Butten professor of management studies at the University of Oxford, has an interesting and analytical look at the economics and arguments surrounding CEO pay, available in its entirety here:

The attack on CEO compensation comes from two directions. Some argue that CEO compensation is too high, exceeding the level CEOs would obtain in arm’s length transactions; others argue that CEO compensation is too low-powered, that is, too insensitive to firm performance.

The problem with the “too high” argument is that it is not easy to find an absolute threshold beyond which CEO compensation becomes unreasonable.
 
At a company such as Walt Disney Co. (NYSE: DIS), with around $3 billion in after-tax profits, a CEO capable of boosting profits by a modest 5% could—even if we capitalize earnings at a modest price-earnings multiple of 5—raise corporate value by $750 million. In this context, the “outrageous” salary earned by Disney’s ex-CEO, Michael Eisner, of around $100 million does not seem so outrageous.

• Because it is difficult for critics of CEO compensation to measure either the scope for CEO value creation or the diffusion of star talent across the population of CEOs, critics for the most part attack the level of CEO compensation through comparisons, either by comparing the CEO of today with the CEO of yesteryear or by making cross-country comparisons.

Lucian Bebchuk and Yaniv Grinstein (2005), for example, show that US CEOs’ compensation relative to corporate profits has grown substantially between 1993 and 2003. Martin J. Conyon and Kevin J. Murphy show that in 1997, CEO compensation in the US was more than double CEO compensation in the UK.

• At first glance, these observations seem to support the idea that, at least in the US, lowering CEO compensation would be in shareholders’ interest. However, upon further inspection, the case is less clear. Much depends on how compensation is measured. Carola Frydman and Raven Saks (2007) show that relative to assets, the increase in US CEOs’ compensation is very modest. Moreover, the increase over the 1990s compensated for a decrease in normalized compensation in the preceding 10 years.

• The indictment of CEO compensation that is based on “low performance sensitivity” is also less than air-tight. The argument is that “high-powered” CEO compensation, which deals out very high rewards on average but concentrates these rewards at the top end of firm performance, is the ideal way to incentivize managers. This rests on the assumption that a board’s problem of designing incentives for the CEO is qualitatively similar to the standard problem of inducing effort from an employee.
 
However, the CEO’s position relative to shareholders is fundamentally different from a worker’s position relative to his boss. The CEO has a huge information advantage over the board and enormous discretion. In this environment, CEOs need incentives to do the right thing, even when their firm is sailing through rough seas and very ambitious performance targets are out of sight.

• Moreover, a weak relation between the CEO’s current performance and current compensation does not imply a weak relation between long-run performance and the CEO’s long-run compensation.

In a dynamic world, rewards for performance need not be meted out at the same time as performance. My research with Rebello shows that optimal CEO compensation can lead to a very weak relation of current CEO pay and current firm performance and yet produce a very strong link between the long-term value of the CEO’s position and firm performance. The empirical research of John F. Boschen and Kimberly Smith (1994) shows that a weak current but strong long-term link is typical of US firms.