Pay and rewards: CEOs out of kilter

Corporate governance is one of the weak spots of capitalism. There has been evidence of this for a very long time, and there was evidence of it again in a report on executive pay by a research group called The Corporate Library.

The report looked at the cases of 11 companies in which the boss' pay seemed strangely unconnected to performance. In these companies, the CEOs were paid $865 million over five years during which the companies lost $640 million in shareholder value.

"The link between long-term value growth and long-term incentive awards is broken at too many companies — if it was ever forged properly in the first place," said Paul Hodgson, the study's principal author.

The strong point of capitalism is the market. Put out an inferior product and the market will punish you. Work diligently and smartly, and most times you will have plenty of work at good pay.

The market works best when the product is easy to judge, when status, position, power and human feeling don't interfere too much, and when decisions come in small doses. None of these things applies when hiring an executive officer.

The Portland, Maine, consulting group that produced the study has no new system to offer, nor have we.

The present system is better than it used to be. Rules now require public companies to have a majority of outside directors, which is some evidence of independence. Judging from this study, however, it is not enough.

In a public company, in which the CEO typically owns only a tiny slice of the stock, and at hiring none at all, the problem is to align the CEO's interest with the company's. In theory, the directors work for the shareholders; in reality, the executive pay packages and takeover defenses may suggest otherwise. A director may be tied to the company through financial transactions.

All these things are mere indications of the real but immeasurable quality, which is mental independence. Choosing and compensating a CEO is a difficult task, and far too often in America it is not done well.