How to reign in soaring CEO pay

Colourful commeter at Harry's Place, Benji Mackie, reports on another example of corporate largesse. Albeit on a smaller scale than Robert Nardelli, but more hypocritically, Guardian Editor, Alan Rusbridger, has been awarded a 14.7% increase in his annual salary to £312,000 plus a £175,000 bonus. Guardian Media Group CEO, Carolyn McCall, received a 9% salary increase to £280,000 plus a £215,000 bonus. At the same time Guardian sales are flat, despite the relaunch, and the Guardian and Observer lost £49.9m. Many Guardian staff got only a 3% pay rise.

The Guardian newspaper has this to say about executive pay,

"The problem is getting worse. Every year top executives vote themselves rewards totally out of kilter both with what their employees earn and the success they achieve."

Before capitalism is tarnished for good, how should Boards reward their CEOs? Here are six suggestions.

i) Charge CEOs for using capital.
It's all well and good going out and borrowing money at say, 6% and then earning 8% on that, but CEOs should only be paid if they invest in projects that exceed a firm's economic cost of capital (10% is a good guide).

ii) Replace restricted stock with options.
Options used to be the preferred measure of payment but since the accounting treatment of options has changed, companies have reverted back to paying in stock. Hence, CEOs can still earn huge money even if their stock price drifts up slowly with the market. Options struck at higher than current share prices, require serious outperformance.

iii) Force CEOs to hold stock for up to ten years
This will mean long-term planning is favoured over a quick short-term fix. Insist on CEOs maintaining their shareholdings until retirement. (If they need the money for that third house in Aspen, they can always borrow against their stockholdings).

iv) Pay CEOs almost entirely in stock and options
Their fortunes must be tied into the share price

v) Pay CEOs on the share price performance versus a basket of similar companies.
Even a great CEO will see his or her stock price fall in a bear market, but if they have outperformed their peers they should be rewarded. Similarly, anyone running a commodities business that hasn't seen their share price double over the past three years, should be fired.

vi) Pay CEOs on staff turnover numbers
All CEOs talk about the 'war for talent' but how many are actually rewarded for retaining good staff. Make it a a part of the annual bonus.

Noone minds seeing quality people receive large sums of money, but there has to be a restoration of the link between risk and reward. And there has to be a penalty for failure.