In Search of Excess: The Overcompensation of the American Executive.

As the smoke clears on the eighties, Drexel's Michael Milken is walking the big yard and Salomon's John Gutfreund is deposed. Greed, however, is free and thriving. And Crystal, a Berkeley professor, has written an important book on businessmen whose money lust remains unchecked.

Last year, Time Warner Inc.'s chairman, Steven Ross, got a cool $78 million after Time Inc. took over his company. Occidental Petroleum's Armand Hammer did nearly as well even after he kicked the bucket. Stockholders are now stuck paying the remainder of his $18.3 million contract to his heirs. But while these two are among the most famous examples of CEOs scarfing up unfathomable millions, Crystal, once a compensation consultant himself, argues that the abuses they represent have become institutionalized. In his painstaking survey of 200 major companies, Crystal found that the average total direct compensation for those CEOs is $2.8 million. Take out the extraordinarily big earners like Ross, and the number still comes to $2.4 million.

As with any management issue, there is a crucial, tedious question: What about Japan? According to Crystal, $2.4 million is seven times more than major Japanese companies pay their CEOs. This is not pretty. Perhaps it is time for Chrysler's Lee Iacocca (a beneficiary of more than $43 million in stock-option gains over the past six years) to give his need-to-stay-competitive stump speech to his fellow CEOs.

Talented CEOs should be well paid. And in contrast to Japan, the American ethos is to reward individual achievement. Even so, looking at the nation's numbers through the lens of history shows something has gone haywire. Plato once told Aristotle that no one should earn more than five times the pay of the lowest-paid worker in the community; J.P. Morgan updated the ratio, but held to the maxim, paying his chief executive officers no more than 20 times the lowliest worker. Today, however, a typical U.S. CEO earns a whopping 129 times the wages of the average manufacturing worker - about 150 times if the service industry is put in the mix. What is more astounding is the fact that this figure is up from a comparatively sane factor of 35 in 1974. (Japan? CEOs earn 16 times the average prole's wage. Germany? Twenty.)

Although this book is no page turner, Crystal reveals a compensation system that over the years grew increasingly rigged, greased, and wired. Once upon a time, compensation packages were determined by salary and stock options, which were designed to provide long-term incentives. Stock options make sense, linking executive pay to what matters to shareholders. But in the depressed bear market of the seventies, many a chairman decided that the problem was that no one on Wall Street really knew how to value equity securities. Why should they suffer because their stock prices were inaccurately low?

This thinking, Crystal explains, gave rise to a curious hired gun called the outside compensation consultant. With the help of these consultants, many CEOs jettisoned the idea that their performance should be tied to the market price of their stock, choosing instead to base pay demands on surveys of the loot their brethren at comparable companies pulled in. Crystal points out that this gives CEOs something of a stacked deck, since, for example, Nissan is not factored into the Big Three auto manufacturing comparisons. Studies are also made of every conceivable indicator of a company's health, from earnings per share growth to cash flow, in order to justify a CEO's salary. There's restricted stock, a basically free share given to executives, and reload-option features, which guarantee the highest possible price for option shares. The latter is a nice safety net, given that, as Crystal points out, a CEO's knowledge of his company's long-term health amounts to insider trading on stock option plans.

After the consultant, who is beholden to the chairman, picks a number, the findings go to the generally friendly board of directors. In some cases, CEOs sit on one another's boards. Even Forbes magazine, a perennial defender of greed, recently questioned this practice, asking if such "strange boardfellows" can fairly represent shareholders on pay issues.

While companies should pay the big bucks to hang on to effective managers, it's not exactly an arms-length negotiation when Steve Ross tells his insider-stuffed board that he desperately wants to hold on to Steve Ross. And insulation from any kind of risk has led to an alarming gap between some CEOs' pay and their companies' performance. For example, Stephen Wolf, the head of United Airlines, reportedly earned $18.3 million last year, as the airline's stock fell by 71 percent.

Crystal reports that there are CEOs who like to compare the pittance they make to the earnings of a Jack Nicholson or a Jose Canseco. But movie stars have to make blockbusters and athletes have to win to keep pulling in superstar salaries. In those cases, performance is still linked to pay. Crystal tells the story about a year when Herbert Hoover made $75,000 and Babe Ruth made $80,000. Why should a ball player make more than a president? Ruth had the right answer: "I had a better year than he did."