Executive Pay Disclosure

So, the SEC is making some regulatory changes to how executive compensation is disclosed, the idea being to build on regulations from 2006 that help people understand how stock compensation translates to actual dollars.

Under current rules, companies don't have to reveal the full value of stock options they give an executive. Instead, they must disclose in their annual proxy statements only the portion of an options award that vests that year.
The new rule will require companies to show in a summary table the estimated value of all stock-based awards on the day they are granted. The SEC's 2006 rules had relegated those totals to a separate table that investors often overlook or find hard to decipher.
An example is the case of a company that decides its CEO deserves $10 million worth of stock options, to vest in equal installments over four years. Under current rules, the company would have to include only $2.5 million -- one-fourth of the total -- in the summary table.

Well, that sounds nice. Too bad it won't really do anything worthwhile. Back in 1992, the SEC made some moves to improve transparency of executive pay, which was hailed as a good thing. At the time, it was thought that executive compensation was out of hand and needed to be reined in. Transparency was supposed to be a big step in the right direction, as most thought shareholders would complain over excessive compensation and bring things back to some semblance of normalcy. Guess what happened after that? CEO pay increased 400% between 1992 and 2000! Why? I think it was because CEO's got a good look at what their peers were making, and those who were below average complained until their boards gave them more money, which turned into a continuous cycle of companies wanting to pay "above average" for good CEO's, which naturally raises CEO pay. Good stuff eh? Notice shareholders didn't do squat to alleviate anything.
"We learn from history that we learn nothing from history." - George Bernard Shaw.

I think the real key to 'curing' executive compensation is to approach things from a different angle. Everyone seems to be focused on how much CEO's get paid. Indeed, these recent SEC disclosure moves only serve to better understand the how much aspect. But what about how they get paid? If we understand the structure of pay, perhaps we could get better compensation practices that might of their own accord bring CEO pay to what it really should be (something that should be left to the market, though so far the market has been inept). Harvard Business Review has some excellent columns on this. I quote from the second link:

Let's look at modern executive compensation in this light. It has become dominantly stock-based, such that the biggest rewards come from an increase in stock price following the establishment of the incentive compensation system. How then do executives reap incentive rewards? The answer is simple. Since a stock price is nothing but the market's consensus of expectations about the future performance of their company, executives can only reap a compensation reward if they increase the expectations of future performance above their current level.
Now apply the first test. To what extent do executives have control over increasing the market's expectations about the future performance of the company? Very little. That is proven by the degree to which expectations fluctuate dramatically more than real results of publicly-traded companies. Real results dropped slightly in the fall of 2008 and expectations plummeted to half their previous level.
Then apply the second test. Do we really want first and foremost the expectations of stock market participants to rise regardless of anything else? I guess one could say the answer is yes if expectations could rise forever. But interestingly, that has never happened with any stock - ever. Expectations fluctuate because they are the product of imagination and speculation, not actual company results. What is more true is that we would wish that real variables, like earnings per share or market share or return on invested capital, would grow from their previous levels. If they grow, then expectations and stock price will grow with a sound underpinning rather than through idle speculation.
Because it's impossible to keep expectations rising forever, executives are smart enough to do so in the short term and get out before expectations fall. The very cleverest CEOs (and those who showed no mercy to their successors) like Coke's Robert Goizueta and GE's Jack Welch were able to manage expectations wonderfully until the day of their retirement. But look at what that personal profit-maximizing behavior did to their corporations, and their hapless successors. By focusing on stock-based compensation, we have caused executives to manufacture stock market volatility rather than build long term value. And it isn't their fault; it is the fault of their boards. It is the boards who swallowed the stock-based compensation fallacy - hook, line and sinker.
Fortunately, there is a simple solution. Scrap stock-based compensation entirely and compensate executives on the basis of improving real measures such as EPS, ROIC, and market share. Those are things over which executives exert significant control and if they improve those real results, stock price will follow. It isn't hard or complicated. It just takes going back to principles.

The hard part will be to break the current system, where prospective CEO's seem to be able to dictate highly favorable compensation packages. I don't know how to get corporations to shift their compensation strategies, but I'd prefer it not be through regulation in this case. Government regulation of pay is something I am not in favor of. Goldman Sachs has taken a small step towards tying their executive pay to company performance, but as HBR points out above, they're unfortunately using the wrong metric for performance.