“MOST VALUABLE BOSSES” At a time of economic pain and insecurity, populist outrage inevitably focuses on corporate leaders who pocket huge paychecks despite the wretched performance of their companies. For instance, since Kenneth D. Lewis took over as top executive of Bank of America in April, 2001, the firm’s annual return of -8% (as reported by Forbes Magazine) significantly trailed the record of the S & P 500, but Mr. Lewis has received compensation that averages more than $30 million annually.

Fortunately, many other bosses offer a wholesome contrast to the well-publicized instances of lavish pay for poor performance. Since 2002, Forbes has compiled an annual scorecard of performance vs. pay to select those executives whose achievements represent the most conspicuous bargains for investors. At the top of this “Most Valuable Bosses” list for 2009 was Michael L. Bennett of Terra Industries, a chemical company specializing in nitrogen compounds. Over the last six years, he delivered an eye-popping annual return to shareholders of 64%. His payment during that period of spectacular growth averaged a relatively modest $3.5 million (including salary and other benefits).

Another example of an apparently underpaid executive is Jeff Bezos of Amazon.com, who has generated an annualized total return during his career with the company of 40%. During the last six years, however, he took total, annual compensation of “only” a million dollars a year. Since he also owns 24% of Amazon’s stock, it’s probably inappropriate to feel pity for Mr. Bezos, who still places 110th on the Forbes List of world billionaires.

PAID FOR DOING THE WRONG THINGS

The most trenchant analysis of the financial catastrophes of recent years suggests that businesses suffered most from the misguided basis for calculating executive rewards, not from the mere size of bonuses and compensation packages. Judith Samuelson (of the Aspen Institute) and Lynn Stout (of UCLA Law School) summarized their conclusions in the Wall Street Journal (February 26, 2009): “Our economy didn’t get into this mess because executives were paid too much. Rather, they were paid too much for doing the wrong things.”

At the heart of the problem was “short-termism” – a tendency to emphasize quick, risky gains rather than steady, long-term progress. “Over the past decade, corporations in general – and banks and finance companies in particular – have become increasingly focused on a single, short-term goal: raising share price,” write Samuelson and Stout. “Rather than focusing on producing quality products and services, they have become consumed with earnings management, ‘financial engineering,’ and moving risks off their balance sheets.” The emphasis on stock options in executive compensation provided powerful incentives for the dangerous emphasis on short-term gain, since the value of the option depends exclusively on the price of the company’s stock on the option exercise date—most often just a few years in the future. Continued...