HOW CEO PAY GOT AWAY

It's springtime, which means shareholder activists and Big Labor have taken up their favorite pastime: railing against runaway CEO pay. This year's batch of proxy statements provides plenty of ammunition. The corner office of a typical Fortune 500 company comes with annual total compensation of $7.8 million, an increase of roughly 50% over last year. CEOs make a good 200 times more than the average factory worker, even if you throw in the 3% raise that working stiffs gained in 1996. The pay disparity is five times greater than it was 30 years ago--and it's growing. You can almost hear the proletariat sharpening the guillotine.

But wait. The packages that give astronomical amounts to CEOs are exactly the deals that critics were clamoring for in the late 1980s. Then the bigwigs were pulling down huge salaries, out of proportion to company results. The solution? Link pay to stock performance. It seems to have worked like a charm. Corporate profits are at a record high, a task that is, after all, the CEO's job. Those lush profits have helped the stock market soar, as anyone with a mutual fund plainly knows. And it is that bull market that has turned millions upon millions of stock options into pure CEO gold, in cartloads unforeseen by anyone.

So why are shareholders so sore? Because, as usual, corporate America has a taste for excess, particularly in the sheer number of stock options being granted. With nearly half the Fortune 500 companies reporting, about 6% granted their CEO at least 1 million stock options last year. (An option gives the holder the right to buy stock at a preset price within a specific period of time, regardless of what happens in the market.) You don't need to take off your socks to figure that a stock gain of merely $1--a slam dunk for any company that is not soundly asleep--mints an instant $1 million for each of those CEOs. That's pay for showing up, not pay for performance. A growing number of CEOs get so-called megagrants, which are grants of stock options valued at more than three times the CEO's annual salary and bonus. Such grants are an increasingly large and irksome cost shared by all stockholders. The value of existing shares is diluted when new shares are created to hand over to the boss.

Most visible in the land of megagrants is Walt Disney chief Michael Eisner, who was just given options on an astounding 8 million shares, a value compensation experts fix at $196 million. Like most options packages, Eisner's cannot be cashed out all at once. They must be used over a period of years, and their true value will be determined by how well the stock does in that period. So, in a sense, it's misleading to put a value on them now. (Corporations are required to provide the value of the options either at the date they are granted or project their future worth.) On the other hand, by the time he fully cashes out these options--a mere year's worth--they could be worth more than half a billion dollars. And that is in addition to salary, bonus and free rides at Space Mountain. Counting the options, his 1996 compensation comes to $204 million. While Disney stockholders have done well under Eisner's long reign, Eisner himself has done even better. "Shareholders are starting to wonder whether it is just too much," says David Leach, executive vice president of Compensation Resource Group, a consulting firm based in Pasadena, California.