Keeping executive pay in check

Over the past 25 years, the average CEO's pay package has increased an inflation-adjusted 600% and the ratio of the pay of a top executive to the average worker has quadrupled. On Saturday, the New York Times published an excellent piece with eight steps to curbing executive overcompensation. Among them are hiring independent advisers (as opposed to the common practice of the CEO hiring a consultant to decide how much he or she should be paid ... hmm), avoiding contracts, improving the role of shareholders in determining executive pay, and getting money managers to vote.

Executive compensation is a factor that investors need to look at more closely. To learn about the compensation of the mangers of a stock you own, you can look at the company proxy statement, which can be found by searching for "DEF 14A" in the SEC's Edgar database. In general, look for insiders who own a large chunk of the company's stock. When executives collect high salaries, own little stock, and exercise options frequently, it is often indicative of the interests of management being poorly aligned with those of shareholders.

For the ultimate in corporate governance, take a look at Berkshire Hathaway (NYSE: BRK.A). CEO Warren Buffett collects a salary of $100,000 per year, with no stock options and no bonuses, and has nearly all of his personal wealth invested in his company. While this is an extreme example, any CEO who has staked his or her personal fortune on the success of the company has a powerful incentive to deliver strong results to shareholders.