Exec comp redux.

• Author: Rock, Robert H.
• Position: LETTER FROM THE CHAIRMAN

'Heart-stopping, pants-dropping, eye-popping, jaw-dropping, hair-raising, eyes-glazing, mind-blowing, juices-flowing." Paraphrasing Bruce Springsteen's introduction of his E Street Band at its Rock and Roll Hall of Fame induction also aptly characterizes the fury surrounding CEO compensation. Gravity-defying and mystifying, pay for top executives has shot up; today the typical CEO of a Fortune 500 firm "earns" on average $15 million. In a 1982 issue of Directors & Boards we asked in a lead article, "Is Any CEO Worth $1 Million a Year?" Today, almost any CEO is apparently worth $1 million--a month!

According to the Washington-based Economic Policy Institute, from 1978 to 2013 U.S. chief executive compensation, adjusted for inflation, rose almost 1000%, vastly more than the 10.2% increase in the average American worker's pay. In 2013, the average U.S. chief executive earned nearly 300 times as much as a typical American worker. Fifty years ago this ratio was 20. Furthermore, several studies, such as a recent one at the London School of Economics, have shown only a weak, if any, correlation between executive pay and corporate performance.

Many investors, academics, consultants, and increasingly directors think the executive comp system is "broken." Some are calling for fundamental reforms. In late April the Securities and Exchange Commission took some modest steps to reform the system. The SEC proposed new rules requiring the approximately 6,000 publicly traded companies to inform shareholders, "in a clear manner," how well top executives' compensation tracks corporate performance.

An outgrowth of the 2010 Dodd-Frank financial law, this SEC proposal is the latest attempt to strengthen an investor's ability to understand executive pay practices. Coming on...