Executive Pay

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The numbers are breathtaking. The top five American CEOs earned a combined $322 million in income last year. Even departing CEOs managed to walk away with huge sums. Hamish Maxwell, who retired as head of Philip Morris, was awarded a generous retirement gift of $24 million, mainly in stock grants and options. Earlier this year, former Compaq Computer CEO Joseph ("Rod") Canion, who was ousted by his board last year, was awarded $3.6 million. And N.J. Nicholas, the co-CEO at Time Warner who, in February, was also bumped by his board, is expected to land softly with a salary, deferred pay, bonuses and stock estimated by some at up to $45 million. Even the nation's leading charity, United Way, fell into the controversy after it was disclosed that president William Aramony, who was forced out, was paid $463,000 a year and enjoyed lavish perks.

Typically, an executive's pay is determined by the board of directors' compensation committee, which usually recommends a package consisting of a mix of incomes. The base salary, for instance, generally accounts for a third of an executive's compensation, while an additional 15% comes from annual bonuses. The rest -- upwards of 50% -- is paid in stock incentives, usually in the form of options that carry no risk if the stock price declines. Critics complain that corporate boards lack clearly delineated formulas for setting pay and that they are not independent enough because chief executive officers often serve as chairmen of boards. The conflict of interest can be eliminated, they argue, by preventing the CEO from wearing both hats. Consultant Graef | Crystal charges that compensation committees are often loaded with other high- paid CEOs. "It's a cozy you-scratch-my-back-I'll-scratch-yours arrangement," he says. "If you're a CEO, you don't want Mother Teresa or the Sisters of Charity on your compensation committee."

Often missing is any real link between pay and performance. Although American corporations are losing ground to foreign rivals, their executives continue to be the most richly paid on earth. While the average Japanese chief executive earns $400,000 in annual pay and the typical head of a major German company makes about $800,000 a year, most heads of major U.S. companies make $1 million to $4 million a year. This disparity was embarrassingly highlighted earlier this year when the Big Three auto chiefs accompanied President Bush on an ill-fated trade mission to Japan. Although General Motors', Ford's and Chrysler's combined losses totaled $7.5 billion last year, their top executives were together paid $5.3 million. Their counterparts at Toyota, Nissan and Honda collectively made $1.8 million.