On April 3rd, 2009 WSJ reported the results of their annual CEO Pay Survey.

Median salary and bonus in 2008 was $2.24M, a drop of 8.5% from the previous year. But that’s not the total package. Total CEO compensation also includes stock, stock options, stock appreciation rights (SAR), restricted stock units (RSU) and other long term incentives. That brought the median figure to $7.6M, a drop of only 3.4%.

Long time shareholders, who dutifully read the annual reports of the companies whose shares they own, will recognize this decades long ploy. No matter how much the company’s profits drop, most CEOs find a way to dip into the pockets of the owners, the shareholders of the company. The footnotes to the financial statements are where shareholders may find that performance goals for the CEO were changed during the year to reflect the “challenging environment”. The company’s profit may have fallen by 50% but the CEO met these new performance goals, enabling them to take home a fat bonus or other incentive. In short, shareholder dividends are reduced and the money put into the pockets of the executives.

Shareholders who have joined together to protest these sham practices are effectively brushed off by the executives. Mutual fund managers who, by proxy of the funds customers, own a sizeable portion of the company’s stock, are reluctant to confront the executives of the company to demand changes. The board can often be comprised of those who are either allies of the CEO or unlikely to challenge the CEO – a practice called “packing the board”. Some CEOs defend this practice as being in the “long term interests” of the shareholders on the basis that the board and CEO agree on the strategic approach to running the company.

The board, whose duty is to act in the interests of the shareholders, are reluctant to confront the CEO and, in effect, act in the interests of the top executives. An example of this practice is Rick Wagoner, the recently ousted chairman and CEO of General Motors (GM). When Wagoner assumed the role of Chairman in addition to his duties as CEO, seven out of 11 directors were replaced. For an interesting look back on this example of the principal-agent problem, see this 2005 Slate article.

There may be some hope for shareholders. The anger over AIG has “given boards the backbone to write stricter standards on pay”, reports WSJ.

As a disclaimer, I used to be a GM shareholder several years ago. I got wise to Wagoner for a small cost.