Corporate America’s scandal of the year may have been suspect timing of option grants, with more than 150 public companies under investigation by the SEC or the Justice Department, more than $5 billion in profit erased by restatements and 18 CEOs swept from office. And the chasm between executives’ salaries and the pay of rank-and-file employees continues to widen.

Although the economy has been improving, according to a poll by the Society for Human Resource Management and The Wall Street Journal‘s CareerJournal.com (via Management-Issues.com), organizations remain somewhat cautious about increasing spending, including spending on what is perceived as the most valuable incentive for employees to stay at their place of employment: salaries.

Sibson Consulting reports that most employers “anticipate a less-than-4-percent base pay increase” for the vast majority of their workers in 2007 — about the same as in the past few years. For someone earning $40,000 a year, a pay hike of 3 percent to 4 percent works out to as little as $100 per month before taxes, which doesn’t exactly justify booking the cruise.

Meanwhile, a bankruptcy judge last month capped annual bonuses for auto supplier Dana Corp.’s leader at $5.5 million. The order, according to the Toledo Blade, said that Dana can pay Chairman and CEO Mike Burns up to $5.5 million in annual bonuses during the auto supplier’s bankruptcy on top of his salary of slightly more than $1 million a year if the company meets certain financial targets. Five other executives, each paid $385,000 to $440,000 a year, will be eligible for a total of up to $7.01 million in annual bonuses.

Or consider media mogul Barry Diller, who Corporate Library ranked as the highest paid CEO year before last. The corporate governance research group pegged Diller’s 2005 compensation at $295 million (No, there is no missing decimal point.), most of which came from stock options.

The chasm between executives’ salaries and the pay of rank-and-file employees continues to widen.

Workforce Management editor John Hollon recently proposed that the disconnect between salaries matters for two reasons: proportion and perception.

Hollon wrote:

Executive pay only becomes a hot button when it seems out of proportion to the success of the company and everyone else who works there … In other words, people will accept big paydays for top executives as long as they track along with the overall success of the company.

Perception, however, is about the widely held notion that no matter what happens, the CEO always gets a big payday. The workforce deals with layoffs, buyouts and a sense of constant job insecurity, yet the executive gets a golden parachute when he or she fails.

Just yesterday Robert Nardelli resigned as chief executive of Home Depot, after months of wrangling with investors over his heavyweight salary and the poor performance of the company’s stock. Since Nardelli joined the company in December 2000, the home improvement retail giant’s stock has fallen about 5.6 percent. Over that period, Nardelli managed to pull in $123.7 million in compensation. In leaving the Atlanta-based company, Nardelli will receive cash, stock, options and benefits valued at $210 million, according to Forbes. That’s more than the $198 million former Pfizer Chief Executive Henry McKinnell departed with after investors expressed their anger over his company’s stock price.

Moreover, Workforce Management noted Bruce Karatz, the KB Home chief executive who was let go after an investigation found he had picked stock option dates that inflated the value of stock grants he had received. His punishment was a meager $175 million in stock options, severance and pension benefits.

“Employee salary increases have barely covered cost-of-living adjustments, while CEO pay has skyrocketed,” said management consultant John Challenger. “To have the highest paid executives attempt to get even more money by backdating stock options is undoubtedly and understandably being viewed with considerable ire among rank-and-file employees.

The result could be lower productivity, decreased morale, higher turnover and an inability to recruit top talent.” (See: “I’m Not Paid Enough to Fully Engage In My Job. But That’s Only Half the Point.”)

Indeed, in addition to Hewlett-Packard’s corporate spying, suspect timing of option grants has turned into corporate America’s scandal of the year, with more than 150 public companies under investigation by the SEC or the Justice Department, more than $5 billion in profit erased by restatements and 18 CEOs swept out of office.

When stock options are backdated, they are issued retroactively to coincide with low points in a company’s share price, fattening monetary benefit for options recipients when they sell their shares at higher market prices. Backdating options can be legal as long as the practice is disclosed properly to investors and approved by the company’s board. In some cases, however, the practice can run afoul of federal accounting and tax laws.

An academic study completed by University of Michigan researchers in the fall found that corporate executives gained an average of $600,000 a year each from backdating of stock option between 2000 and 2004.

Under new federal rules, which took effect on Dec. 15, investors are getting access to clearer and more detailed information from public companies on their top executives’ pay packages and perks. The rules were designed to enhance corporate accountability and address the very same aforementioned issue that has been angering company shareholders and the public: lavish compensation for executives, unrelated to their performance, even as companies stumble or tumble, lay off employees or renege on billions of dollars in pension obligations for workers’ retirement.

In the SEC’s 72-year history, perhaps no other issue has stirred as much interest, with more than 20,000 letters filed during the public comment period that followed the proposal being floated last January, according to agency officials.

Investors, customers and the general public seem to have grown somewhat impervious to corporate scandals of varying degrees, even tolerating apparent criminal behavior as long as it doesn’t interrupt their own businesses.

One would think that when such missteps directly affect the everyday workforce’s own pay, enough would be enough.

Resources

Runaway Pay
by John Hollon
Workforce Management, Dec. 11, 2006

2007 shapes up for retention crunch
by Nic Paton
Management-Issues.com, Dec. 20, 2006

How big will your raise be in 2007?
by Anne Fisher
Fortune, Dec. 20, 2006

Judge lowers CEO bonus cap
by Julie M. McKinnon
Toledo Blade, Dec. 19, 2006