How Much Is a CEO Worth?

Kenneth Feinberg, the U.S. Treasury Dept.'s pay czar, recently reduced executive salaries at government-controlled American International Group and General Motors to reflect company performance. In much of Corporate America, as Bloomberg Businessweek first reported in its Apr. 5 issue, no such realignment took place.

Graef Crystal, a pioneer in compensation consulting, analyzed the 2009 pay of 271 chief executive officers. His findings? "Simply put," Crystal says, "companies don't pay for performance."

Although there is no standard method for analyzing compensation, Crystal, 76, developed the formulas he uses over the course of 30 years advising companies such as CBS (CBS), Coca-Cola (KO), and American Express (AXP) on their pay practices. In an ideal world, Crystal and many investors agree, stock performance and CEO pay would be closely aligned. But no matter how he parsed the numbers, Crystal discovered no relationship between shareholder returns and CEO compensation.

At the outset, he found that the CEOs' average pay went down 4.7 percent last year to $9.95 million. The highest paid was CBS' Leslie Moonves with $43.2 million, and the lowest was Citigroup's (C) Vikram Pandit with $128,751. Crystal didn't include any bonuses awarded in 2010 in his analysis.

Crystal then created a "fair pay" model that redistributed the $2.7 billion aggregate payroll of all of the CEOs according to each company's shareholder return, adjusted for company size. Under that model, Moonves would have taken a $28 million pay cut, while Google's (GOOG) Eric Schmidt, who was the second-lowest paid last year with $245,322, would have seen an increase to $17.4 million. Frank Baldino Jr., the founder of Cephalon (CEPH), was the most overpaid, according to Crystal's algorithm: He took home $11.15 million, eight times more than what the model said he deserved.

Crystal recommends awarding stock options with a strike price that's the average of the last 90 days and can't be exercised for five years to avoid "opportunistic" pricing. He also suggests reducing bonuses if incentive targets aren't met.

Some of Crystal's former clients have called him a Judas for criticizing the system he used to be a part of. He prefers to be compared to Mary Magdalene. "Maybe I was a hooker," he says. "But I'm hoping to end my life as a saint."

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