Pay for performance is an excellent idea, and last year Corporate America received one heck of a lot of performance for the pay it gave CEOs. In a year when profits shot up a staggering 34%, the average salary and bonus of chief executives climbed only 10%, to $1.4 million, says BUSINESS WEEK's 45th annual Executive Pay Scoreboard. Not bad.
Not the whole truth, either. Under heavy pressure from institutional holders and regulators, companies have been shifting more and more of CEOs' pay into stock options. That ties compensation directly to stock performance. The more the shareholders make, the more the CEOs get. Fine.
But last year, the stock market performed dismally, with sharply rising interest rates canceling any benefit from higher earnings. So most CEOs tucked their options away for a more auspicious moment. The first quarter of this year, with the Standard & Poor's 500-stock index up 9%, provided that moment. Chief executives probably exercised options in a big way. That means total compensation will probably skyrocket in 1995. Which is just fine, too. They earned it.
But that doesn't mean the CEOs deserve it all. Increasingly, boards are taking a chief-executive-as-superstar approach to compensation, allocating up to 25% of all options to one person. There certainly are superstars in the corporate universe, such as AlliedSignal Inc.'s Chairman and CEO Lawrence A. Bossidy, who has boosted the company's market value from $4.5 billion to $10 billion during his four-year reign. Yet in the global marketplace, no one individual ever battles alone. In an era obsessed with team play and horizontal organizations, the reward for victory at many companies still goes to the top-of-the-pyramid, hierarchical boss. Too bad.