Despite the efforts of compensation committee members to be scientific, there is tremendous variation in CEO pay. Much of this can be explained by differences in tenure, industry, and company size and performance. But substantial variation – up to 50 percent in some instances – is not explained by any conventional objective metrics. Cynics attribute this variation to cronyism or the randomness of executive pay. We attribute it to the highly subjective nature of CEO compensation and, in a shareholder-friendly sense, to the judgment, fine-tuning, care, and deliberation – for example, factoring in differences in business strategy and culture – that go into these pay decisions.

Other elements contribute to the difficulty of the task. Compensation committees historically have dealt piecemeal with management recommendations that came in – bonuses and salary increases in January, stock options in March, SERP enhancements in September – with no tally sheet that added it all up. Although pay-for-performance has clearly increased, the linkage could have been clearer. And finally, CEO contracts and severance plans (especially after a change of control, with the associated gross-up payments) were considered necessary merely for the company to be competitive.