Executive Compensation: What Happened? - 5 Feb 2009 (a history of how we got here)

By Paige Churchman (New York City)

The overpaid executives have become a lightning rod for our rage.
Everyone’s jumping in. The President calls them shameful. The Merrill
Lynch cafeteria workers, who make about $410 a week (paid by their
contractor Aramark), take to the streets with a picture of John Thain’s
$87,000 area rug. The exorbitantly paid have gone from star status to
villains. Not so long ago, Thain was hailed as “Mr. Fixit.”

The problem started sneaking up on us about thirty years ago.
According to the Economic Policy Institute, in 1965 US CEOs in major
companies earned 24 times more than the average worker. That seemed
about right. The ratio had been around 20:1 for most of the twentieth
century. Then in the late seventies the gap slowly began to grow,
reaching 35:1 in 1979. But in the 1990s, the gap broke into a full
gallop, hitting 275:1 in 2007. In other words, says the report,
“a CEO earned more in one work day…than the typical worker earned all
year.” Occasionally, when a study drew attention to the growing
imbalance, there was some shock, but it didn’t stay on our radars. The
economy was strong. A President spoke of “trickle down.” People were
happy.  Until the economy fell apart. Now the gall of those overpaid
guys is all we hear about, and President Obama has just announced a
$500,000 cap for executives at companies receiving the largest amounts
of bailout money.

How Did It Come to This?

The star system has been a big part of the problem says Rakesh Khurana, a Harvard Business School associate professor and author of Searching for a Corporate Savior: The Irrational Quest for Charismatic CEO.
Right about when this started happening, in the late 1970s, there was a
rise of institutional investors. These investors had the clout to
pressure boards of failing companies to remove their CEOs. Not a bad
thing. So boards went outside, seeking big personalities and charisma
to save their companies. “A famous CEO was preferred over a low-profile
CEO, as the former was seen as a boost to public and investor
confidence—and share prices — fast,” says Khurana.
But in doing so, they were bypassing industry wisdom and experience
from the company’s internal talent. It created the “fiction that there
is actually a real CEO labor market,” says Khurana. But market forces
don’t play much of a role. Though the CEOs were compared with star
athletes, the analogy doesn’t hold up.  The boards are not sports teams
negotiating for the best interests of the team. They are more like
country clubs, a closed culture of other CEOs, socially and
economically linked. Another difference — sports teams don’t try to
hide what they’re paying in complicated compensation packages.

SEC Commissioner Roel C. Campos
offers another reason for inflated CEO packages. Boards hire
compensation consultants to help them determine a CEO’s compensation.
Campos says it’s
like what happens when you find a house to buy and hire someone to
appraise it. Think about it. Does the appraiser ever come up with a
number less than what you’ve agreed to pay? Of course not.  “It is
extremely difficult to avoid using high comparables,” says Campos, “And
consultants can pretty much find high comparable income data to support
paying a high amount to the CEO.”

If you think disclosure might be the answer to runaway pay, think again. In Executive Compensation: The Fallacy of Disclosure, Paulo Cioppa
shows that attempts at disclosure have actually driven compensation
numbers even higher. In 1992, the SEC adopted executive compensation
proxy disclosure rules, hoping that the transparency would make
executives more accountable to their shareholders. Instead, CEOs and
CFOs have used the data to demand

more...http://www.theglasshammer.com/news/2009/02/05/executive-compensation-what-happened/