PERSPECTIVE ON EXECUTIVE PAY : Offset Greed With a Dose of Risk : Does it really matter how much CEOs make? You bet it does--to workers, shareholders and consumers.

You can hardly pick up a newspaper or magazine these days without reading about the latest outrage that some greed-choked chief executive officer has perpetrated on innocent shareholders. The stories make exciting reading, because Americans relish the exposure of villainy.

But does it really matter how much CEOs and other senior executives make? Can we not reasonably view a CEO’s relationship with shareholders as the economic equivalent of vigorous sex? Shareholders may get roughed up a bit, but they keep coming back for more. And consider also that the CEO’s pay package, though it may no longer get lost in the rounding of company earnings, doesn’t have much of an impact, either.

But it does matter, and it matters for three reasons. First, there is hardly any relationship between what a CEO earns and the performance of the company, whether performance is judged by short-term, medium-term or long-term returns to shareholders. Examining the data from 459 major companies, I discovered that about 15% of differences in CEO pay (which ranged from a practical minimum of $250,000 per year to a practical maximum of $11.5 million) could be explained by differences in company size. But only 5% of the differences could be explained by differences in company performance. As for the remaining 80% of the differences, well, it’s your guess.

Second, this lack of relationship between CEO pay and company performance in turn spawns two negative consequences. It transforms what are supposed to be costs that vary according to performance into essentially fixed costs, thereby making recovery from an economic downturn that much harder. But even more important, it sunders the feeling between workers and management that “we are all in this together.”

How can that be so, a typical worker might reason, when he stands to lose his job while the CEO is paid the usual bonus and is given yet another huge stock option that will make him all the richer, even if the stock recovers only a fraction of the ground it lost during the last several years? This weakening of organizational cohesion can have vast long-term effects, even if those effects are hard to measure.

Third, those who argue that CEO pay has little impact on the bottom line forget that the pay package of a CEO acts like a giant vacuum cleaner, pulling up the pay packages of many other executives. One study I conducted shows that if you give the CEO a $1,000 raise, you give the chief operating officer, on average, a $400 raise, the chief financial officer a $250 raise and the chief legal officer a $150 raise.

In this case, the cost of the $1,000 raise has almost doubled, and we’ve looked only at three out of possibly hundreds of other executives in the company. It is no wonder then that when you pay the CEO above the market, you get not above-market performance, but rather below-market performance. My research shows that for each $1 million the CEO is overpaid, the company’s one-year increase in aggregate shareholder value declines by $63 million.

Is it possible here that our theories of motivation are bankrupt, that money really doesn’t motivate any longer? Clearly, a worker earning the minimum wage will work a lot harder and a lot smarter to double his pay. But will a CEO who is earning $5 million per year work harder and/or smarter to make $10 million? In his more honest moments, he will tell you that he is working as hard as he can. And he will react with indignation to the notion that he is holding back some of his smartest thinking until the Brinks truck arrives.

Although there is evidence to show that shareholders are bearing the cost of high senior executive pay, there is no reason to suppose that they are the only people stuck with the tab. How about America’s consumers? It is common practice to pass on, or at least attempt to pass on, an extra cost in the form of higher selling prices. A while back, the Japanese government, in responding to our complaints about unfair trading practices, charged that if we paid our executives less, our selling prices could be reduced. And if our selling prices were reduced, then our market share could be increased. It is hard to argue against their logic.

So it does matter, and it matters a lot. If we are going to get out of the mess we have created for ourselves, one of two things will have to happen. CEOs either will have to accept a lot more risk in their pay packages--risk that will send their income plummeting in the bad times, such as we are now experiencing, or they will have to significantly lower their pay.

Neither of these alternatives may be terribly palatable to those who sit in the corner office. But both offer solutions to an urgent national problem.