In a story titled "CEOs and their Indian rope trick", The Economist says that executive pay should reflect performance, with total remuneration fluctuating with company performance. However, it reports that in practice, there has been little sign of that.
[T]op executives' remuneration spiralled up, with the stockmarket as a whole, in the boom years at the end of the 1990s. But it continued to levitate thereafter, like the subject of an Indian rope trick. Mercer, a consultancy, says that the median compensation of bosses of big American firms...rose from $5.2m in 2000 to over $7m in 2001, a year when tumbling share prices cut shareholders' assets by some 12%.As a result, the difference in pay between top executives and their workers has grown.
In 1991 the pay of the average American large-company boss was about 140 times that of the average worker; by last year, it was over 500 times, and growing. Last year's 7.2% rise in the average American boss's total compensation is worth over $400,000--nice work, if you can get it.The Economist adds that the European chief executive's pay lags behind that of the American. According to the Hay Group, a consultancy, the basic salary of the chief executive is about the same on both sides of the Atlantic, but while variable pay adds only 150 percent to that in Europe, it adds 400 percent in America.
The Economist highlights several initiatives to address the issue of high executive pay. One was by CalPERS, America's largest public pension fund, to hold "directors and compensation committees more accountable for their actions". Another is the possible introduction of accounting rules that would compel American companies next year to treat share options as expenses to discourage their use (share options allow executives to profit from increases in the price of their company's shares, even when the price movements are not directly attributable to the executives).
Of course, the way that the boards of most corporations are structured, chief executives usually have an advantage in determining their own remuneration anyway. Individual shareholders often lack voting clout, with shareholdings divided among many parties. Even the majority shareholder -- sometimes represented by just an officer from the parent company -- would likely have less at stake when determining the chief executive's pay than the latter himself.
Furthermore, the chief executive, placed between the shareholders and the rest of the company, controls information flow to and from the company, while also being able to play off shareholders against each other. Thus, politically astute chief executives can concentrate actual power in the boardroom in themselves instead of the shareholders, where it rightfully belongs.
All these factors give chief executives an advantage in squeezing out lucrative remuneration for themselves. Regulation to improve corporate governance and dampen executive remuneration works best when it takes this advantage into account.