Thanks to Wall Street’s latest shenanigans, the normally arcane topic of CEO pay has made it to the nightly news — and given average Americans still another reason to sneer at the corporate world. But, as with so many controversies in business, one man’s scandal is another man’s average day. Though American CEOs are famous for their diamond-encrusted compensation packages, you’ll find many defenders who espouse what Princeton economics professor Uwe E. Reinhardt calls the Lone Ranger Theory. It goes something like this: Sure, that eight-figure CEO salary might look high, but since the chief exec is the one suit with the power to push a company’s market capitalization into the stratosphere, he deserves to be rewarded when he does it.
Not everyone’s familiar with the Lone Ranger moniker, but the concept goes by a simpler, more accessible name: pay for performance. It’s why so many compensation packages — including those of agency, client and media CEOs — are tied to stock price and various other indicators of a company’s overall value and vitality.
The only problem with all this is, of course, that some CEOs don’t push market cap into the stratosphere. Some preside over companies that hemorrhage money, lose clients and watch the stock price fall through the floor-yet still walk away with “performance-based” compensation bigger than the GNP of a tropical republic.