Stocks may fall, but pay doesn't

At a time when average Americans feel poorer because their homes are worth less and the economy's teetering on the brink of a recession, the public is focusing on CEO compensation as never before.

Don't think boards of directors aren't paying attention.

"This is a jump-ball year," says Jeff Cunningham, chairman and CEO of Directorship magazine. "We get the message. Directors are at the negotiating table with their CEOs, looking for very rational pay schemes; no funny business, no games — just pure performance-driven pay planning."

This new attitude is already showing up in some areas, says Ira Kay of Watson Wyatt, a compensation consulting firm. "Bonuses are definitely following profits, especially in the retail and financial sectors," says Kay.

The fact that the economy began slowing in 2007 — and that the stock market has been on the skids for six months — is likely to play a bigger role in 2008 compensation. "CEO pay follows what happens in the market; it doesn't lead it," says Coleman.

The fallout from the turbulence in the financial markets affected the earnings of bank CEOs.

Bank of America bac chief Kenneth Lewis saw his compensation drop from $22.7 million in 2006 to $20.4 million in 2007. At Wachovia wb, CEO G. Kennedy Thompson's pay slipped from $18.3 million to $15.7 million.

Heads I win, tails you lose

Two years ago, the pay packages that stirred the loudest outrage were the ones granted to Bob Nardelli, former CEO of Home Depot hd, and Hank McKinnell, former CEO of Pfizer pfe.

Both men were ousted from their jobs in 2006 following mediocre performances, but both walked off into the sunset with nearly $200 million in severance packages.

Last year, the biggest CEO blowouts took place on Wall Street. The subprime mortgage crisis, which led to home foreclosures across the country, had been fueled by easy access to mortgages, even for people who were unlikely to make their monthly payments.

The easy access to money, meanwhile, was fueled by Wall Street banks that saw minimal risk in securities backed by these subprime mortgages. These banks, led by Citigroup, Merrill Lynch, UBS and Bear Stearns, plunged headlong into the business of packaging and selling mortgage-backed securities, and stashed billions of dollars worth of the stuff onto their own balance sheets, as well.

When the market imploded last summer, those financial products did, too, forcing the firms that owned them to take billions of dollars in write-downs.

Shareholders paid dearly for the bad decisions and inadequate risk-management practices on Wall Street as bank stocks plummeted. How did the executives responsible for this mess fare?

•At Citigroup c, CEO Charles Prince was forced out in November, but on his way out the door, the board gave him a bonus of $10 million. He was also allowed to keep $28 million worth of unvested restricted stock and options, and was granted $1.5 million in annual perks.

•At Merrill Lynch mer, CEO E. Stanley O'Neal resigned in October. Although he didn't receive any special bonus or severance, he walked away with a $161 million package, consisting mostly of stock and options that he had earned through the course of his career at Merrill.

"It's outrageous for CEOs to take risks that hurt shareholders and walk away with enough to never have to work again," says Robert Mittelstaedt, dean of the W.P. Carey School of Business at Arizona State University.

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