I start with three premises that I believe are accurate reflections of financial reality.
(1) Nobody genuinely knows the origins, motive power or consequences of excessive executive compensation. If we knew these elements, it would would be easy to regulate executive compensation and it would have occurred before now. Some corporations with excessive compensation do well and some do poorly over time. No factual data can define or create a stable long term executive compensation system that is beneficial to society. (2) American financial reforms have little positive effect when initially introduced and often have negative consequences. The limit on tax deductibility of executive compensation in 1993 at $1 million was the primary source the subsequent explosion of stock options, back-dating of stock options, ghost stock plans, monstrous retirement benefits and many more evasive tactics.
(3) Envy does not trump greed. Punitive controls on executive compensation cannot work. The envious person does not apply the determination, intelligence or skill that the greedy person applies to avoiding regulation. In time the envious person loses interest; the greedy person doesn't.
What will work in restraining excessive executive compensation is to establish a publicly agreed upon set of executive packages that any corporation can select for its executives. By selecting from a pre-established package of compensation, the ground rules can be made explicit and understood by all relevant parties including shareholders, government agencies, board members and fellow employees.
Here are three examples of what I mean by publicly agreed upon executive compensation packages:
Blue package. The chief executive and five other named executives shall receive supplementary taxable wages every year based on the percentage increase in net corporate profits of the previous year when compared to a moving average of the previous three years.
Orange package. The chief executive and select other named executives shall receive supplementary taxable wages (50%) and shares of corporate stock (50%) based on three times the percentage increase of the net corporate profits of the prior year compared to a moving average of the previous three years, plus the increase in percentage of the shareholder value of the prior year compared to a moving average of the previous three years. A decrease in his two-element number shall result in a decrease of 20% in the ordinary taxable wages of the executive.
Red package. The chief executive and select other named executives shall receive supplementary after-tax wages (10%), shares of corporate stock (50%) and stock options (40%), based on the percentage increase of the net corporate profits of the prior year compared to the average of six named similar corporations in the same industry. A comparative decrease in number shall result in a 50% decrease in the ordinary taxable wages of the executive.
Summary. The nature of the packages are open, understandable to everyone involved and designed with clearly beneficial public objectives