Can wild CEO pay be tamed? Probably not

So, what needs to be done to finally clamp down on CEO pay and incentives that encourage short-term gains, but do little for the long-term health of the nation’s corporations?

Shareholders can take an overpaid executive or board members who approved pay packages to court. But legally they would have to prove that the board overstepped its bounds in some way, such as backdating options, for example, says Stuart Grant, an attorney with Grant & Eisenhofer, a law firm that has litigated executive compensation cases.

“I don’t know if there’s ever been a case just solely based on executive pay that’s come to judgment that’s been successful,” he explains. “You have to find some back door.”

While few industry observers would go on the record defending exorbitant CEO paychecks, compensation consultant Alan Johnson says, “pay for executives is set in the marketplace. ... Do I wish executives got paid less? Absolutely. Is it terrible for society? Yes. But it is the market.”

If companies want to attract the best and brightest, they have to pay CEOs competitively, says Craig Rennie, finance professor in the Sam M. Walton College of Business at the University of Arkansas. “You can say, ‘Maybe we need to restrict executive compensation,’ ” he explains, but then executives will say, " 'We will go live in London where there’s a friendlier regulatory environment.’ ”

For government regulators, fixing the problem is a matter of finding the right balance, says Houman B. Shadab, a senior research fellow at George Mason University’s Mercatus Center's regulatory studies program. “Compensation decisions should best be left up to shareholders and boards of directors, and the way you do that is give shareholders more control.”

Even before bailout plan was proposed, Congress had been reviewing two provisions that many compensation experts say would give shareholders more of a voice.

The Shareholder Vote on Executive Compensation Act, also known as the “say on pay” bill,  sponsored by Rep. Barney Frank, D-Mass., would give shareholders the right to a nonbinding vote on the executive pay packages and golden parachutes. Even though the vote would be nonbinding, Frank has said a vote against a compensation decision would put pressure on the board. It passed the House in April and is pending in the Senate, where Barack Obama is sponsoring the bill.

Another key proposal that would help is allowing shareholders to vote for board members without engaging in a proxy fight, says the Corporate Library’s Hodgson.

Since boards at U.S. corporations are so entrenched, adding just one independent voice could go a long way, he adds.

“It would change the psychological dynamic on the board because you’d have a member that says, ‘I am here because the shareholders put me here’ rather than ‘The CEO nominated me,’ ” he explains. “Board members are smart, but collectively they become a herd.”

Neither the “say on pay” or proxy access provisions were in the bailout plan voted on this week, Hodgson adds.

Another option is creating incentives for board members. Elson, with the Center for Corporate Governance, believes having board members become equity stakeholders in the companies they oversee will also help incentivize them to keep mega pay packages under wraps because they’ll have as much at stake as the shareholders.

No matter what happens, when you look at exploding CEO pay, there are clearly two reasons things need to change, says Dan Pedrotty, director of the AFL-CIO’s office of investment.

“The concern is equality and fairness," he says. "But also if we pay for failure at a company, that’s less long-term value that a company generates for shareholders."

The union, he says, represents not only its working members but also retirees who have a large stake in corporate America through their pensions and 401(k)s.

For 10 years, the AFL-CIO has been pointing out the excesses of management pay on its Executive PayWatch website with the purpose of “bringing attention to CEO pay abuses and mobilizing public opinion to do something,” says Pedrotty.

This year’s theme: the link between CEO pay and the subprime disaster.

“A large part of how we got here, in addition to lack of regulation and greed, was the way the incentive packages were structured to incentivize the executives to take risks,” he notes. “As a result, lots of money was paid to undeserving CEOs.”

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