What’s a CEO worth? Millions ... and then some

That’s not how the board — and executives — at Costco see it.

CEO Sinegal and company Chairman Jeffrey Brotman haven’t received a salary increase in six years, a period when shares of the nation’s largest wholesale club operator rose 28.3 percent.

“The philosophy of the board, in terms of compensating executives, is that we are fairly paid, if not slightly underpaid, relative to other corporate peers,” Richard Galanti, the company’s chief financial officer and a director, said in an interview. “But that’s OK. It’s a fair wage, but not absurd.”

“I think it sends a message to our employees that they don’t see their CEO’s name on the Top Five highest-paid people in the world,” he said. “It’s a positive message.”

Not every board thinks the same way as Costco’s, which angers J. Richard Finlay, founder of The Centre for Corporate & Public Governance in Toronto, which bills itself as North America’s first independent think tank for corporate ethics.

CEO pay isn’t set by markets, Finlay said in an e-mail interview. Instead, it is “determined by a small clique of like-minded directors, most of whom are themselves past and current CEOs with a vested interest in perpetuating a failed, but to them, remarkably generous, system.”

Billionaire investor Warren Buffett, the world’s second richest man after Microsoft Corp. founder Bill Gates, doesn’t go quite that far. But he did write in his annual letter to Berkshire Hathaway shareholders last year that “too often, executive compensation in the U.S. is ridiculously out of line with performance.”

Some boards, apparently, are starting to agree. Harvard law professor Lucian Bebchuk, co-author of the book “Pay Without Performance,” said board members have been calling him to talk about proposals he made this year at a handful of companies to give shareholders a louder voice on pay.

As a shareholder activist, he engaged three of them — American International Group Inc., Bristol-Myers Squibb Co. and Home Depot. All agreed that CEO compensation should be ratified by the entire board, not just the compensation committee.

“I did not expect boards to be so willing to make changes,” he said.

The SEC’s new disclosure rules also required companies to explain the thinking behind their CEO pay packages, describing, in detail, the goals they’ve set for executives in a section called compensation discussion and analysis.

John Wilcox, head of corporate governance at retirement system TIAA-CREF, which manages more than $410 billion, said his sense is that “some companies are backing into this process.”

“Some have admitted, as they have gone through this process, that they have not had a compensation philosophy,” he said.

The rules also mandate narratives, in plain English, explaining how pay decisions are reached. But a study of the disclosures by Clarity Communications found that most failed to meet readability standards many states require for insurance forms.

“It’s a complex subject and that’s really the question — Why is it so complex?” said Dominic Jones, Clarity’s president.

“Why is it that a CEO gets compensated in such a discombobulating fashion when the average worker gets a paycheck and can tell immediately what it’s about? ... If you’re an investor and you get your (proxy) statement and it just goes on for pages and pages of the different methods used to pay the CEO, at some point you have to ask yourself why. ’Why don’t I get all this?”’

Still, if the process around pay is inching its way toward something that looks more democratic, executive pay may be one area where gravity doesn’t apply.

Said TIAA-CREF Wilcox: “Once it’s up there, it’s very hard to pull it down again.”

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