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The pay's the thing

April 22, 2006

EXECUTIVE COMPENSATION in the United States has swollen to the point where even Gordon Gekko might blush.

Just look at two sweetheart deals in the headlines this week. A newly released review of former Exxon Mobil Corp. Chairman Lee R. Raymond's pay package shows he made $686 million on paper from 1993 to 2005. That translates to $144,573 for every day he worked. The company defends the extravagance, saying that Raymond's paycheck was duly approved by its board of directors.

More dodgy is the case of UnitedHealth Group Inc. Chief Executive William W. McGuire. According to a recent report in the Wall Street Journal, McGuire has in recent years exercised company options a dozen times just days before a substantial run-up in share price. UnitedHealth insists that the transactions were "appropriate," but the newspaper estimated McGuire's odds of being that lucky at about 1 in 200 million. One theory is that the company has been "backdating" his options, retroactively cashing them on days when the stock's price is low.

Last week the company announced a review of its stock grant policy, and the Securities and Exchange Commission has opened a broad inquiry into the practice.

Not surprisingly, these and other recent revelations about grossly overpaid CEOs have added urgency to the clamor in Washington for more laws limiting executive compensation. Sounds satisfying, but it's actually a fool's errand.

In fact, this kind of logic is partly what got us here in the first place. In 1993, Congress passed legislation that denied a corporate tax deduction for pay in excess of $1 million. Companies reacted by granting top employees an ever-increasing number of stock options and other performance-based goodies. In theory, giving executives incentives to boost a company's share price is a good idea. But shareholders and potential investors need more oversight to ensure that all compensation is properly accounted for and disclosed in an appropriate way.

One good reform idea is requiring better transparency. The SEC is pushing companies to report CEOs' total compensation in one place, rather than bury it on 15 different pages of financial reports. Another intriguing trial balloon is "indexing" options to the S&P 500 or some other broad index, so that executives can't cash out unless the stock outperforms the average company.

Beyond that, the only sensible way to bring executive pay back to earth is for reform to start at home. Boards of directors are frequently too cowed, and too disorganized, to reign in the star CEOs who (after all) work for them. Sure, top employees deserve high salaries, and the best talent is deservedly expensive. But shareholders are simply not being served when their chief executive earns more than the gross domestic product of many countries. When people like McGuire have $1.4 billion worth of unused stock options, the whole system of incentives is seriously out of whack.

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