business

Stopping Runaway Ceo Pay

An unintended consequence of President Bush's January trade mission to Japan with a retinue of 21 top business executives was to underscore the yawning discrepancy between the compensation of chief executive officers in the U.S. and those in Japan. Many Japanese and Americans were shocked to learn that the compensation of CEOs of large U.S. corporations averages 2 million (dollars), compared with about 500,000 (dollars) in Japan. Add to that a blistering denunciation of CEO compensation practices by consultant Graef S. Crystal in his widely quoted In Search of Excess, and the issue of executive compensation has suddenly moved to the forefront of public debate.

Predictably, politicians have moved into the fray with calls to stem executive pay raises through income taxation. This is a bum idea - and not just because many companies would simply pay the added taxes. The right place to halt immoderate CEO pay raises is in the corporate boardroom. A good start would be for the compensation committee of the board to retain an outside consultant to review recommendations of pay consultants, who are typically hired by the CEO. The boss should make himself scarce when his own pay is being discussed. Lawyers, investment bankers, and consultants who draw fees from the company shouldn't serve on the committee, nor should other CEOs - to forestall the old-boy network. And to forge a link between the shareholders and the board, directors should be paid in shares.

The criteria governing compensation also need reform. For starters, the boss should get a salary, bonus, stock options-period. A CEO's base salary should not exceed 1 million, even for the largest companies. Anything more should be paid only when the CEO and his management group meet tough performance targets against an industry peer group. Set stock-option grants above market levels so shareholders benefit before executives. And stock options, which do have value, should be charged against earnings.

Salary, bonus, and options should be reported in the proxy statement in a single, easy-to-read table that includes data for three years. As the Securities & Exchange Commission rightly recommended in February, the remuneration package should be easy for anyone, especially stockholders and potential investors, to understand.

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE