At the time, most companies provided a severance of one year's salary, said Bill Coleman, chief compensation officer for Salary.com, which helps companies set employee salaries based on their performance. But companies interpreted the rules to mean that anything up to three times the salary was permissible, and severance packages began rising to that level, he said.
"It was intended to be the ridiculous maximum possible anybody could pay, but it eventually became the benchmark," Coleman said.
In addition, companies that exceeded the severance level for an employee simply provided a bonus payment to cover additional income taxes, a practice known as grossing up.
"It did not have the effect of reducing severance pay," Hodgson said. "It had the effect of increasing it."
Seven years later, when Bill Clinton was running for president, he seized on executive salaries as a campaign issue. Graef Crystal, a former executive compensation consultant and author of six books on the subject, said Clinton called him with an idea to limit a company's ability to deduct more than $1 million in salary for top executives from their taxes. Crystal said he told Clinton it wouldn't work.
In fact, it may have backfired.
The resulting law, which was passed in 1993, is widely believed to have led to the explosion in stock options for executives as companies sought ways to avoid the salary restriction. Total CEO compensation surged through the rest of the decade, to 300 times the average worker's salary in 2000 from 100 times the average in 1993, according to the Economic Policy Institute, a liberal think tank.
According to another advocacy group, United for a Fair Economy, the average annual CEO pay for top companies in 2007 was $10.5 million, or 344 times that of the average U.S. worker.
"The people on Wall Street may be greedy . . . but they're very smart," Crystal said. "I'm sure the consultants can hardly wait to get their hands on these restrictions and figure their way around them."
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jim.puzzanghera@latimes.com
