A Success-Based Model for Executive Pay

The recent stock market fluctuations have me thinking about excessive executive pay. One article touching on the subject that has stuck with me the past few weeks was by Gretchen Morgenson - How Big a Payday for the Pay Consultants? Here's an excerpt:

Even as the stock market flags and credit losses mount, executive pay marches higher. Ousted chief executives also continue to reap rich going-away gifts. Martin Sullivan, lately deposed as chief executive of A.I.G., may receive $68 million in severance as he makes his way out the door, according to the Corporate Library, a governance research firm. Never mind that his shareholders lost 41 percent of their market value since he took over the company in March 2005.

The question this raises to me is: if a company's management is acting on behalf of its shareholders, why is there such a disconnect between the prosperity of the shareholders and executive pay? I'm continually reading about "golden parachutes" - lavish compensation packages to executives following a tenure with unsuccessful results.

This blog is a forum to raise issues, but also one to propose solutions. Taking a long-term view, where the interests of both the shareholders and the executives are aligned, makes sense to me.

Suppose executive pay was based on a sliding scale of the average of the stock price from the previous three or four years? This would tie, in a very real way, the success of the company to the success of the executives. It would provide incentive for growth and increased profits. I'm a strong believer in success-based models - it's one of the principles of the MoneyAisle system, where a bank only pays us a fee after they've successfully acquired a new customer. I see no reason why a success-based model can't be equally applied to the boardroom.