It's hard to find people who approve of CEO compensation levels these days. Many will surely rejoice upon hearing that for the second year in a row, the median total compensation of North American CEOs shrank. Despite that, there's a troubling trend in CEO pay, one that can hurt shareholders.

First, though, let's review the good news, with figures from The Corporate Library:

  • Median total compensation fell by 2.8% from 2008 to 2009.
  • More than half (56%) of CEOs experienced a decline in their annual pay.
  • Bigger companies cut their leaders' pay more, with S&P 500 CEOs experiencing a median compensation drop of more than 11%.

Falling numbers
Bear in mind, though, that those are only median figures. Some bigwigs experienced much more severe drops. Caterpillar (NYSE: CAT) CEO Jim Owens, for instance, saw his total compensation fall 54% between 2008 and 2009, from $14.6 million to $6.8 million. Some would argue that was fitting, as the company dismissed 19,000 full-time workers and 18,000 contract and part-time workers during the period. Even though the stock rose 31%, Owens got less stock-based compensation than in previous years.

Similarly, Verizon (NYSE: VZ) CEO Ivan Seidenberg saw his total compensation fall about 14%, to $17.5 million, between 2008 and 2009. His company's stock continued to struggle, gaining just 3% despite the big rally. Earnings that came in below target contributed to the pay decline.

Some numbers may seem not to have fallen enough. Jeffrey Peek, former CEO of CIT Group (NYSE: CIT), saw his compensation fall 76%, to $1 million, in 2009. That might seem harsh, but considering that the company lost $4 billion in 2009 and filed for bankruptcy protection, wiping out its former common shareholders, some would say his walking away with a million dollars wasn't enough punishment.

Rising numbers
Still, massive increases persist at many companies, confounding many investors. WellPoint (NYSE: WLP) CEO Angela Braly enjoyed a 51% increase in total compensation, to $13.1 million, between 2008 and 2009, due largely to grants of stock. At least the company didn't bleed at the same time; its stock surged 38% in 2009, buoyed by the sale of its NextRx subsidiary to Express Scripts (Nasdaq: ESRX).

That's the kind of argument for hefty compensation that does hold water. If a CEO is helping a company grow significantly, perhaps earning billions, then it doesn't seem so crazy to pay her millions. Paying a sizable chunk of change can be reasonable to keep a talented manager at the helm of a strong performer.

Less understandable are examples such as Kraft (NYSE: KFT) CEO Irene Rosenfeld, whose total compensation rose 38%, to more than $22 million, in 2009, a year in which the company's stock rose just 5.5%. More annoying to many shareholders, though, may be that Berkshire Hathaway's (NYSE: BRK-B) Warren Buffett saw Kraft's recent acquisition of Cadbury as overpriced.

The troubling trend
While it's encouraging that CEO salaries have been dropping, don't get too excited. As the economy starts cooking again, I won't be surprised to see compensation levels soaring again. And here's something else to fret about: According to the folks at The Corporate Library, between 2006 and 2008, there has been a shift from rewarding CEOs with stock options to rewarding them with fully valued stock. The problem is that this reduces the alignment of CEO interests and shareholder interests, because even if the stock price falls, the full-value shares will maintain some value, whereas stock options might not offer much value unless the share price is increased, presumably by the CEO's efforts.

CEO compensation is likely to remain a vexing issue for investors. Do you see any promising solutions to keep compensation levels from soaring? Leave a comment below and let us know!

Here's a modest proposal to reduce CEO pay. Is it outlandish or sensible?