New CEO disclosure rules won't fix the system
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Recently the Business Roundtable, whose members are CEOs of 160 large U.S. companies, released a study that portrays top brass in a more favorable light. The study is based on 350 large, public companies and shows the median pay of CEOs was only $6.8 million last year (including salary, bonus and options). The ratio of CEO pay to that of the average worker was merely 179 to 1, the study finds.

That disparity still looks huge to me. Even 40 to 1 looks big.

There are all kinds of ways that CEO pay affects company profits and, therefore, shareholders. For instance, executive pension plans are generally not funded, mainly because they provide no tax break to the company. (And in fact if a company does fund executive pensions, it's considered current compensation to executives, who would have to pay taxes on it). But because most remain unfunded, they're considered debt, and debts are subtracted from earnings each quarter, so their impact on company earnings is significant.

The big lie
But stock options present another, perhaps bigger, bugaboo. In fact, the whole premise behind stock options -- that they align the CEO's interests with that of shareholders because they compensate CEOs for their performance -- is a great deception, argues John Bogle, founder of low-cost Vanguard funds and shareholder advocate extraordinaire. He wrote a white paper called "The Executive Compensation System is Broken" (registration required).

"The price of a stock is a terrible basis for any kind of a compensation scheme," he says. "Yet it serves as the basis for most of the compensation plans ... today. We're giving much more attention to the momentary precision of the price of a stock than the eternal, if elusive and vague, intrinsic value of a corporation."

Instead of seeing compensation packages that are based on a corporation's future cash flows (the true measure of a corporation's value), CEO pay is based entirely on stock price, which creates a "system that is ripe for abuse," he says.

"It is said that stock option plans align the interests of managers with the interests of the owners. Seldom has a more untoward lie been foisted on the American public. Options do no such thing. They have a lottery-like benefit. Executives do not hold their stock. Academic studies have shown that as soon as their options vest, executives exercise the options and proceed to sell the shares almost immediately. Executives are not stockholders; they're gamblers in the stock market lottery."

It's a contrived lottery that's set up for them to win. And the new SEC disclosure rules don't offer any checks and balances to improve that situation for shareholders.

Longtime financial journalist Barbara Mlotek Whelehan earned a certificate of specialization in financial planning. If you have a comment or suggestion about this column, write to Boomer Bucks.