Executive Pay

Options can reward any increase in the share price. That became painfully clear in the bull market of the 1990s when executives benefited from rising share prices even if their stocks lagged behind competitors or market averages.

Then came an epidemic of accounting scandals, which showed that options gave executives powerful incentives to cook the books and kite their stocks. More recently, many companies were found to have secretly manipulated the terms of options. By backdating the awards -- in other words, falsely claiming that the options were granted when the stock price was especially low -- companies lowered the performance hurdle and made the options much more valuable.

As an alternative to options, or in addition to options, many boards shower executives with stock that vests over a period of years. But those awards are widely mocked as "pay for pulse" because they have value even if the stock price falls. Some boards layer on additional requirements -- for example, the executives can't collect the stock unless the company's profit or share price hits certain targets. If the targets aren't easy to hit, they can introduce more incentives to cheat.

Meanwhile, boards have a history of openly changing the rules to benefit the boss. When performance targets proved too hard to meet last year, a bunch of companies dispensed with their criteria and awarded bonuses anyway, according to a report this month by the Corporate Library.

Government efforts to reform executive pay have had mixed results.

When the government limited the tax-deductibility of executive salaries, many boards stuck shareholders with the added taxes instead of capping the salaries. When the government mandated clearer disclosure of executive pay, it gave shareholders fresh ammunition to complain -- but it also gave executives more information about their peers, which gave them new leverage in pay negotiations, Joseph E. Bachelder III, a lawyer for top executives, wrote in the New York Law Journal last year.

In 1992, after the SEC adopted some of the most significant reforms, one leading compensation critic suggested that the actions could put him out of business. "I may be like the Maytag repairman, with nothing to do, sitting here waiting for somebody to be overpaid," Graef Crystal joked. Sixteen years later, Crystal is still fulminating.

At last check, the chief executives of companies in the Standard & Poor's 500-stock index received pay packages valued at an average of $10.5 million, which was 344 times the pay of the typical American worker, according to a study by the Institute For Policy Studies and United for a Fair Economy, which says that "concentrated wealth and power undermine the economy."

Murphy, a co-author of the 1990 Harvard Business Review article, predicted that executive pay will resume its upward climb.

"I think we have a history that shows that uproars over executive compensation at most create short-run changes in pay. And then what usually happens is the government enacts some knee-jerk reactions that at the end of the day end up increasing executive pay," he said.

Chief executives "prefer to play a heads-I-win, tails-you-lose game with shareholders, and so far they've been successful," said Jensen, the other author of the 1990 article. "It's changing, but compensation committees [of corporate boards] still tend to be under the control of the CEO," he said.

Though it may be counterintuitive, the current crisis could plant the seeds for a new bumper crop of executive riches.

As compensation committees ponder their next round of pay decisions, one of the questions they are trying to answer, board advisers said, is how to factor in the decline in stock prices when determining how many shares to award executives. They could give out the same number of shares as in past years, delivering much less value. Or they could give out many more shares to make up for the reduced value of each individual share, setting executives up for huge gains if stock prices recover.