Overpaid CEO? Here's how to find out

By Michael Brush

Few injustices tick off our readers like corporate bosses who make too much money while their shareholders go bust.

One of my columns on the subject, "The 5 most outrageously overpaid CEOs," brought in a torrent of mail.

"No one person is worth several hundred times what the average worker makes," wrote one reader. Another likened juicy CEO pay packages to "legal theft from the shareholders."

But many readers had a more practical bent. "Thanks for your article! Not because we love to hate these guys, but because it gives us another tool to check before we invest," wrote one reader.

Whether you're simply interested in checking what your employer pays its chief or you're using executive pay as a variable in your investing strategy, there's a fairly easy way to discover what a CEO makes. Below, I'll give you a step-by-step guide in how to use that tool.

Who's watching the boss?

Here's why investors should care: Corporate governance experts say that when boards dole out excessive pay to top execs, it is a sure sign that those boards aren't working hard enough for shareholders.

"The decision of what to pay a top executive is one of the best indicators of what a board is doing and thinking," says Ric Marshall, chief analyst at The Corporate Library, an independent research firm that provides corporate governance analysis. "A board that can't say no to top executives, or feels executives should be entitled to some level of compensation that is far above the median, is an ineffective board."

A recent study by Moody's Investors Service confirms Marshall's analysis. The study, called CEO Compensation and Credit Risk, found that excessive pay packages are linked to credit-default risk and credit-ratings downgrades.

Out-of-line bonuses and options grants were more telling than excessive base salaries, says Chris Mann, an author of the Moody's study. This makes sense, because highly paid CEOs tend to get most of their pay in the form of bonuses and options. So that's where you're likely to see the excesses, too.

A CEO with too much influence over a company's board has little incentive to work hard or make smart decisions, because he or she will be raking in millions regardless of how the company performs, concludes the Moody's study.

Do your own detective work

As an investor, how do you gauge whether a board is overpaying a CEO? A complete analysis seems tough, since boards compensate execs with a dizzying array of base salaries, bonuses, options, severance packages and retirement plans. And then there are the perks, such as access to the company jet for personal use, or payments to cover pet grooming.

The good news is that you can get at a lot of basic information on a CEO's pay package by checking a single document companies file with the U.S. Securities and Exchange Commission. This is the proxy statement -- which is meant to update shareholders on the state of a company prior to its annual meeting.

Finding the proxy is easy. Just go to the "company search" page at the SEC Web site, type in your company's name or ticker, and look for the Def 14A form -- the code name for the proxy.

Once you've opened the proxy, find the section titled "executive compensation." Here, you'll find a table laying out the pay packages for the five highest paid execs for the past three years.

As an example, let's take a look at the proxy for Cendant (CD, news, msgs). Cendant is a travel and real-estate services company whose Chief Executive Henry Silverman regularly comes under attack for getting paid too much as the shares of his company lag the market. Over the past two years, Cendant shares are up 10%, compared to gains of 20% for the S&P 500 ($INX). The stock price is roughly where it was in 1998.

On page 21 of the company's most recent proxy statement, filed on March 2, 2005, you'll find a table with all the major components of Silverman's pay package: base salary, bonus, options, restricted stock grants and "other" compensation.

 1 | 2 | next >