Pay setters: chairmen of compensation committees give the lowdown on why executive pay keeps going up.

• Author: Maley, Frank
• Position: FEATURE

Tom Smith ran a big grocery chain for 13 years and was paid handsomely for it. In 1998, his last full year as CEO of Salisbury-based Food Lion Inc., he earned $3 million, according to the formula BUSINESS NORTH CAROLINA uses to calculate executive pay. Adjusted for inflation, that would have been equal to about $3.6 million in 2005. That would put Smith at 20th on this year's ranking of CEO pay at the 75 largest public companies in the state.

He also starred in some of Food Lion's television commercials, so couch potatoes around the state quickly grew familiar with--some, perhaps tired of--his boyish mug interrupting their favorite shows. Since retiring in 1999, he has dropped out of the public eye but not completely out of corporate boardrooms. These days, Smith helps set pay for executives at Concord-based CT Communications Inc. as chairman of its compensation committee.

He's not unusual. Eight of the 10 highest-paid CEOs on the list--compiled by the Charlotte office of human-resources consultant Findley Davies Inc.--run companies where the compensation-committee chairmen are current or former CEOs. Four are, or were, CEOs of public companies. The theory is that few know as much about CEO compensation as CEOs. Few have reason to care as much. But is it wise to let CEOs, past and present, set their peers' pay?

"There are two points of view there," says Paul Hodgson, a compensation specialist at The Corporate Library, a Portland, Maine-based company that researches corporate governance. "One is that it is the fox guarding the henhouse and that they're unlikely to be harsh with their fellow CEOs and say, 'We need to be more modest about our pay levels here.' Alternatively, they may actually have more authority in that situation and therefore be able to stand up to another CEO."

Whether it's the best practice, CEOs often are judged by their peers, and in any given year their pay could go either way. Twenty-three CEOs on our list took pay cuts in 2005, sometimes even when their company produced a positive total return, but 46 got a pay boost--seven even though their companies produced negative returns. The median pay change for CEOs at the state's 75 largest public companies was 13.1% in 2005. That's a smaller increase than the previous year but larger than the median total return in 2005--measured from the first trading day of the fiscal year to the last--of 6.4%. And with a median pay package of $1.4 million, those CEOs won't get much...