Something's Rotten in the State of Executive Compensation:

I can't say that I follow the debate over executive compensation very closely, but I do follow the fortunes of homebuilder stocks. And I've noticed that CEOs of many of the major homebuilders (e.g. Hovnanian, KB Homes, Toll, Lennar), received many millions of dollars in compensation last year. It's true that their companies were very profitable last year, but that was a result of a general housing boom (read bubble), not because of the CEOs' great leadership. ALL of the housing stocks rose dramatically until July of last year (and all of them are down substantially this year). And though I haven't done a serious statistical analysis, there doesn't seem to be any relationship between whetherr or how much a particular housing stock outperformed its peer group and the level of compensation the CEO received.

I have no dog in the various intellectual and political battles over compensation policies. But something is wrong with the system of executive compensation when CEOs are compensated based on profits resulting from macroeconomic trends beyond their control, and not based on their companies' performance relative to their peers. (Something is also wrong when CEOs are ordering their companies to buy back shares on the open market while selling their personal holdings--they don't think the stock is a good value at X price for their personal portfolios, but the company should pay that much? and help prop up the price while the CEOs are selling?--but that's an issue for a future post, perhaps).