Geneen on executive pay.

• Author: Geneen, Harold S.
• Position: Harold S. Geneen

Boards must show more gumption in evaluating the CEO's performance. Here's how we could make the current system work better.

You have to ask, What are corporations paying those mega-millions for? The solemn answer comes back from the board of directors: "Demonstrated capability." But if the company is doing well, surely the CEO's predecessors deserve some credit. I propose breaking up Fortune 500 chief executives' pay, giving one half to the incumbents and splitting the other half among his demonstrably capable predecessors and their heirs.

Absurd? Of course. That's the point. At the moment, there is no logic in these things. The size of the pay package is dictated by habit. To be sure, most companies will hire consultants to advise them on an "appropriate level" of compensation, but all they do is tote up what everybody else in the industry is making and recommend that their clients pay roughly the same. They are, after all, eager to please their clients' bosses. As I said, it's a matter of habit.

This also leads to a steady escalation in the size of compensation packages. Are CEOs worth their paychecks? If so, by what standards? Who sets the standards? Who enforces them? To what extent does dumb luck decide the total?

All good questions - and ones that can't be answered by outbursts of moral indignation. To say that "no man is worth $203 million" (what Michael Eisner reaped in 1994 at Walt Disney Co., mostly from exercising options) isn't a reasoned argument. It is a value judgment. It fails to account for accidents of circumstance. And once we let our gut reaction to supposed excesses guide our social policy, we will be well on the way to socialism.

I have a suggestion. Why not just use logic? To start off, why not ask: What is excessive? There should be some measure of reasonableness. You have to set some objective standards for measuring worth. Otherwise, all you get is hot air. One critic says, "This is unfair. Who can be worth that much?" And the CEO's defenders retort, "That's the price of genius."

If I had to choose, I would err on the side of paying too much for proven performance. It's a risk, but it's a smart risk. However, I would ask a lot of questions: Was the performance really as extraordinary as everybody seems to think? Against what odds did he achieve it? How did the company's profits and stock price stack up against others in the same industry?

Unfortunately, most boards don't delve too deeply into the methodology of calculating the true worth of performance. Doing so might ruffle feathers. Much easier to follow the practice of posing two simple questions to the CEO: What did you make last year? And what should your increase be this year? (I'm oversimplifying, of course. Boards deliberate the question of the CEO's pay with great solemnity. Then, nine times out of 10, they approve a double-digit raise.)

'What are you worth?'

Only when a company is desperately seeking a new chief to put its house in order does the question become: What are you worth? Unfortunately, in such a crisis, the rigorous analysis that would make sense in ordinary times becomes irrelevant. All the probing of the candidate's strengths and weaknesses boils down to a single question: Can he save the company? If the answer is "no," he is worth nothing. If the answer is "probably not," he is worth nothing. If the answer is "maybe," he is worth nothing. If the answer is "probably," he is worth nothing. Only if the answer is "yes" is he worth even a penny. But in that case, he is worth pretty much whatever he asks.

It all goes back to "true performance." The board of directors' problem is to identify the who, the how, and the why.

While it would be a mistake to assume that the number of prodigies capable of running a big corporation is so small that boards have no choice but to pay them $5 million or more, it would also be a mistake to shrink from paying whatever it costs to get the best. After all, it is the most important investment a company ever makes. So important, in fact, that the question shouldn't be: How much does he, or she, cost? The main question is: How do we know he really is the best?

Of course, financial reality always places an upper...