CEO Salaries in the Crosshairs

Pay-for-performance structures are enjoying a resurgence.
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3 min read

This story appears in the February 2009 issue of Entrepreneur. Subscribe »

Last September, Mission Research formed a compensation committee to discuss capping executive pay and by how much.

Charlie Crystle, co-founder of the 35-employee Lancaster, Pennsylvania, software company, would like to see executive pay limited to seven times the company's median salary, which hovers around $60,000. Mission Research generated $3 million in revenue last year. "We're trying to figure out the right mix of goals and bonuses for our executive team," says Crystle, 41. "It's part of our growing up and becoming a real company." Mission Research plans to implement a new compensation structure early this year.

It's a timely move given recent public rage over executive pay. Anger has been simmering for years, but it boiled over last fall amid the taxpayer-funded bailout of the financial sector. Watching CEOs glide away from failed companies with multimillion-dollar severance packages has the public questioning with renewed vigor whether corporate executives are worth what they're paid.

In 2007, the salaries of S&P 500 CEOs averaged $10.5 million--that's 344 times the pay of the average U.S. worker, according to the 2008 CEO compensation report from United for a Fair Economy. Congress is considering a variety of measures, including pay caps on public companies and "say on pay" legislation that lets shareholders vote on executive pay packages.

"The pressure on improving pay for performance will be immense over the next couple of years," says Paul Hodgson, a senior research associate at governance research firm The Corporate Library. Topping its most recent CEO pay survey is Oracle CEO Larry Ellison, who made almost $193 million last year and incited shareholder anger when he received a 38 percent pay increase.

Some CEOs are voluntarily limiting their pay. Since 2004, at least 62 CEOs have signed agreements accepting cuts in pay or forgoing severance packages when times get tough, according to The Corporate Library. The list includes H&R Block CEO Russ Smyth, who has agreed to a pay cut if the company hits tough times. JetBlue Airways CEO David Barger, meanwhile, accepted half pay last summer when the company instituted a hiring freeze.

Mike Lapham, the project director of the Responsible Wealth project, suggests entrepreneurs link their pay clearly to stock price, sales, net income or other performance measures. These "golden parachutes" of financial protection could be off limits, though: An October Syzygy Consulting Group survey found that median total cash compensation and stock option holdings for CEOs at private companies fell 8.7 percent and 4.2 percent, respectively, in 2008, but there's been no change in their severance packages.

Crystle is glad Mission Research decided to revamp its compensation structure: "It's good to get stuff in place now because it can easily get away from you."

Chris Penttila is a freelance journalist whose work has also appeared in The Costco Connection, Oregon Business magazine, QSR Magazine, and other publications. She lives in the Chapel Hill, North Carolina, area, where she manages two kids, a husband and a feisty cat when she's not writing.

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