Chief executives at the nation’s largest corporations earned less in total compensation in 2008 than in 2007, according to an analysis of the pay data of companies in the Standard & Poor's 500 index. Average total compensation for the CEOs declined 2 percent from $11.16 million in 2007 to $10.9 million in 2008. Similarly, median income for these CEOs declined from $8.8 million in 2007 to $8.1 million in 2008.[1]

But even as the economy slumped, the median salary for CEOs of 200 large companies increased 4.5 percent to $1.08 million, according to an April survey by The Wall Street Journal.[2] And CEO's at 54 of the 100 largest companies by market capitalization actually received pay raises.

Despite the public outcry over private jets and other executive perks, companies kept plying executives with generous freebies. Average value of CEO perks in 2008 at S&P companies was $364,041—or nearly 10 times the median salary of a full-time worker.[3]

“When push comes to shove, companies didn’t make as many changes to these programs last year as shareholders would like,” according to David Wise, a senior consultant at the Hay Group, which compiled the survey for The Wall Street Journal.[4]

Meanwhile, The Wall Street Journal’s annual survey found that the median total compensation for CEOs at 200 large companies declined 3.4 percent to $7.56 million.[5] And the median bonus paid to the CEOs of the 200 companies fell, along with profits.

But three banks that received money through the federal government’s Troubled Asset Relief Program (TARP) remained on the list of 200 top-paid CEOs in 2008, according a recent survey by The New York Times.[6] The three are Vikram Pandit, CEO of Citigroup; Kenneth Lewis, Bank of America CEO; and Richard D. Fairbank, CEO of Capital One Financial.[7]

And, despite the stock market’s collapse, only 39 executives, or 19.5 percent of the 200 surveyed by The New York Times, did not receive bonuses in 2008. The rule should be that “if there is no performance, there is no bonus,” says Hye-Won Choi, senior vice president and head of governance for TIAA-CREF, the big pension fund that manages money for teachers.[8]

By March 2008, the nation had lost more than 5.1 million jobs—the steepest drop in the postwar era—since the recession began in December 2007. Unemployment jumped to a 25-year high of 8.5 percent in March, according to the U.S. Department of Labor.[9] And U.S. households lost nearly one-fifth of their wealth in 2008.[10] But the median pay for the full-time workers who kept their jobs rose 4 percent to $37,544 in 2008, from $36,140 the previous year, according to the federal Bureau of Labor Statistics.[11]

It is too early to tell whether the decline of total CEO compensation points to a trend or whether it is merely an anomaly in the upward spiral. However, the ratio of CEO pay to employee wages remains exceedingly high: more than 319 times in 2008, according to the 2009 survey by United for a Fair Economy.[12] This compares with 42 times in 1980.[13]

Boards of directors are responsible for setting CEO pay. Even though a reasonable and fair compensation system for executives and workers is fundamental to the creation of long-term corporate value, directors often award compensation packages to executives and CEOs that go well beyond what is required to attract and retain them. The result is the proliferation of poorly designed executive compensation packages that reward executives for decisions that are not in the long-term interests of companies, their shareholders, their employees and the wider economy.

These ill-conceived packages were partly to blame for the financial crisis, according to Lynn Turner, a former chief accountant of the U.S. Securities and Exchange Commission, who testified at a congressional hearing on AIG that “some business executives got paid both coming and going as they walked away from the equivalent of a train wreck with huge severance packages their corporate boards had agreed to.”[14]

The Congressional Oversight Panel, created by Congress to review TARP and the financial markets, has recommended strategies for reforming executive pay so it does not encourage excessive risk-taking aimed at bolstering short-term profits. In its “Special Report on Regulatory Reform,” the panel recommends that pay packages not rely heavily on stock options and large severance packages. The panel also suggests that executives may orient their activities toward long-term value creation, if they are required to hold equity awards for at least two years past retirement, and bonuses should be recouped if the profits they are based on prove to be illusory.[15]

The financial crisis and the steep decline in the stock markets may have been a wake-up call to boards of directors and others who help determine compensation packages. Executive pay consultant Frederic W. Cook, who runs an eponymous consulting firm, describes a sea change in attitudes toward executive compensation: “The American public and their elected representatives will no longer support companies who put their executives’ self-interests and net worth ahead of the company and its stakeholders.”[16]

Legislated restrictions on executive compensation at companies receiving federal bailout funds through TARP are proving to be predictably ineffective.[17] This means the responsibility for changing executive pay culture lies with shareholders and the boards of directors they elect. Shareholders may gain more influence if they get a "say on pay" or an advisory vote on compensation and, more significantly, if they get "proxy access" or a voice in nominating directors. In the end, it is up to boards of directors to respond appropriately and responsibly to the flawed executive pay system by pressing for the changes that will serve long-term shareholders and the health of the entire economy.