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Even before the global financial crisis that we now wake up to every morning, the CEOs of large global corporations were making the news with their exorbitant annual compensation packages. It appeared, nevertheless, that such compensation packages were directly tied to the financial performance of their respective business that they directed.

Theoretically, such compensation systems have merit, as it is such systems that attract and retain successful performers and encourage positive results through a rewards system. However, such is the case in current events that CEOs of failing global businesses are collecting huge amounts of monetary compensation.

Yes, there should be limits to the amount a CEO is compensated, but based on a number of business performance factors and not government intervention. Here are a few simple factors worthy of consideration:

Base salary As with any other employee, the salary level of the CEO should be no more or less than what the relative industry offers. In many industries, the salaries of CEOs are insignificant compared to the remaining compensation package. The levels of base salaries should not change that limits are to be based on business performance.

Profitability If after all the bills are paid and investments have been made to the future, intended to keep the business healthy, resulting net income is positive and meets or exceeds projections, reward the CEO a weighted fraction of the whole incentive package.

Positive change in profitability Based on last year's performance, did profitability improve? If so, reward the CEO another weighted fraction of the whole incentive package.

Limits, based on competitive base salaries and performance, should be driven by the forces of the market. The CEO is typically a smart enough individual with smart enough C-management staffs that changes in the market are factors that she should be able to deal with and respond to accordingly, including contractions and exit strategies.

Some time between the publicity of oil companies' CEOs being rewarded amounts no one could imagine, to the time that CEOs of failing banks and investments companies were being rewarded relatively the same, performance incentives turned into retention packages. No longer was there a reward system based on performance. Further, it is unconscionable for one of these latter CEOs to accept a reward for failing, but not illegal. By the way, it is unimaginable that any one of these jokers should be retained.

Such a response to these individuals' behaviors or lack of business acumen should not be legislated, but driven by the market, as the reward system should be. The market should be influenced away from such behavior, resulting in the negative performance of the CEO and finally, her forced separation from the company.

Concluding, like all employees of a global corporation, compensation should be relative and determined by the market. Limits should be set by corporate governance, not government. Any limits set on CEO compensation legislated by the government are sure to be arbitrary and would lack any further incentives for the CEO to perform at higher levels. Further, legislation that directly influences the free markets is a step toward a centralized economy and communism.

Learn more about this author, J David Childs.
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