CEOs and the Pay-for-Performance Puzzle

Many shareholders and corporate boards agree that our system of paying CEOs is broken. How best to reward good corporate chiefs and discourage bad ones?

By Ben Steverman

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A highly skilled CEO is hard to find. Highly paid CEOs, however, are everywhere you look.

For decades, corporate boards, watchdogs, regulators, and shareholders have argued over the best way to reward corporate leaders for a job well done, while not overpaying mediocre chief executives.

They might not be any closer to solving this pay-for-performance puzzle. But, the extent of the financial crisis and recession has made the problem clear.

The public and politicians have noticed the huge severance packages for executives resigning for poor performance, or the billions of dollars in bonuses awarded just months before financial firms collapsed.

As a result, Congress, the Federal Reserve, and the Securities & Exchange Commission are all considering moves designed to limit excessive pay.

Reining In Compensation

Corporations seem to have gotten the message. On Sept. 21, a Conference Board task force made up of Big Business heavyweights recommended corporations take steps to rein in compensation packages. The task force's first guiding principle: "Establish a clear link between pay, strategy, and performance."

Irking many shareholders and policymakers is that last year's poor performance is having only a small impact on pay.

The Corporate Library's 2009 CEO Pay Survey, issued Sept. 23, showed that median total annual compensation for executives in the S&P 500 declined 0.08% in 2008. Three-quarters of CEOs saw their base salary rise, and only 3% got a salary cut.

Shareholders, however, did far worse: The Standard & Poor's 500-stock index fell 37.6% in 2008.

"Many, many [companies] complained about missing targets" last year, says Paul Hodgson, Corporate Library senior research associate. "But [there were] very few where we saw a significant impact on bonuses."

Oxy's Irani, Apple's Jobs Get Results

A longer time frame can sometimes help justify high pay. For example, Occidental Petroleum (OXY) Chief Executive Ray Irani has pulled in $341.1 million in compensation in the last 10 years, according to data provider Capital IQ. (Capital IQ's compensation measurement includes cash compensation and stock awards, but excludes stock options.) But his shareholders have been rewarded, with their shares up 580% in the last decade, and $54.5 billion has been added to Occidental's market capitalization.

Apple's (AAPL) Steve Jobs can boast of more cost-effective results. He has earned $162.3 million in the last 10 years, but Apple stock is up 860% in that decade and $153.4 billion has been added to Apple's market value.

But for every Jobs or Irani, there is a Jeffrey Immelt. The General Electric (GE) chief executive has earned $125.5 million in the last decade, but shareholders have seen GE's market cap shrink $217 billion and their shares have fallen 58%.

(See the attached slide show for more examples of CEO pay and performance over the last decade.)

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