CEO pay curbs failed before, may fail again

NEW YORK (Reuters) - U.S. lawmakers are insisting that Wall Street chiefs feel the pain in their own pocketbooks in exchange for a $700 billion bailout, but Washington has a poor record when it comes to trying to rein in executive pay.

Compensation of U.S. corporate chiefs has soared in recent decades despite an array of attempts to curb it. Should history be any guide, any new efforts to restrict the earnings of CEOs whose companies get a lifeline from the rescue plan will likely have plenty of loopholes and could backfire, pay experts say.

"We are being very naive if we think that trying to regulate pay is going to stop those payments," said Kevin Murphy, a professor at the University of Southern California's Marshall School of Business and an expert on compensation.

Payouts "will just show up in other ways that may be worse."

Bill Clinton, for instance, vowed to stop runaway CEO pay when he ran for president in 1992. But after he was elected, he helped enact a tax change that ultimately had the opposite effect, Murphy said.

The measure did cap big CEO salaries by allowing companies to get a tax deduction on only $1 million worth of pay for top executives. However, that encouraged companies to shower their leaders with lucrative stock options instead, sending pay to vast new heights as leaders across many industries, and particularly the technology sector, enjoyed an options bonanza.

CEOs did particularly well in the decade following that reform. From 1993 to 2003, median annual pay of CEOs at Standard & Poor's 500 .SPX companies jumped from $1.98 million to $6.58 million, an annual growth rate of 13 percent, according to a study by professors at Vanderbilt University and the University of Pennsylvania's Wharton School of Business.

Other examples of attempted pay curbs that have not worked well, Murphy said, include legislation in the early 1980s aimed at scaling back so-called "golden parachutes" to executives forced out when their companies are sold.

The restrictions ended up making such payments more widespread because more companies became aware of that kind of pay structure, experts say. The new rules also helped encourage future CEOs to negotiate for separate severance they could collect when leaving for reasons other than a corporate takeover. Many top executives today have such severance deals in their job contracts.

Wall Street CEOs are among the most highly paid executives in corporate America, though their compensation -- plus the value of perks like the personal use of company jets and cars -- amounts to only a small fraction of the size of the $700 billion bailout under discussion.

But their pay has stoked populist anger, leading Treasury Secretary Henry Paulson -- the architect of the bailout -- to agree on Wednesday to add some CEO pay restraints to the plan.

Companies typically argue their boards need flexibility to compensate CEOs as they see fit because they could lose talented executives to rivals or to private firms, such as most private equity firms, that are not subject to pay curbs. That's why they find creative ways to pay their leaders when Congress takes steps to restrict compensation, experts say.

"We've seen some efforts to curb CEO pay and they've never been successful," said Steven Hall, managing director of Steven Hall & Partners, an executive compensation consultant. "The place it has to be successful is with the governance process, where directors are voted in and voted out, and they are responsible for stewardship of the company."

Besides Congress, regulators also have stepped in on executive pay issues, but a much anticipated rule change nearly two years ago requiring companies to be more forthcoming about the pay and perks awarded CEOs has not been viewed as a big success.

The rules were aimed at making companies reluctant to pay their leaders excessively out of fear of a shareholder backlash once all the details of pay packages came to light.

But critics say little has changed because the way the information is disclosed means that investors have just gotten buried in a jumble of confusing footnotes that don't tell the whole story about how much CEOs actually take home.

"What has happened is companies have disclosed in such a cumbersome and technical way, that it is mind numbing," said Susan Shultz, president of The Board Institute, an educational group for corporate board members.

It's not clear what CEO pay rules will be part of a bailout package. But Murphy, of the University of Southern California, says he's not optimistic that the ideas coming from this Congress will be better than what has come before.

When lawmakers have acted on pay in the past, "it's almost always been a knee-jerk reaction to a perceived excess," he said. That's led to "consequences that weren't intentioned that have exacerbated rather than mitigated abuses."

(Reporting by Martha Graybow, editing by Gerald E. McCormick)