Tiny ice crystals blew sideways, stinging the January air, as the bald man with a scowl made his way from his mid-Manhattan apartment to a debate a few blocks away. Ira Kay was on a mission to defend rising executive compensation against the outrage of dissatisfied shareholders, governance activists and anyone else who might cross his path. He faced a headwind of popular resentment. The Occupy Wall Street revolt already was in retreat that bitter morning in early 2013 but the "people-powered movement" underscored the gap between the 1 percent and everybody else in America as a new dividing line in contemporary society. In the 3-1/2 years since the economy began recovering from the worst financial crisis since the Great Depression, the wealthiest Americans had watched their incomes grow by nearly one-third while the rest nursed 0.4 percent gains, inspiring one protester in Zucotti Park to hold aloft a cardboard sign stating, "Give Class War A Chance."

Bob Iger, CEO of Walt Disney Corp, John Donahoe, CEO of Ebay and Pierre Dauman, CEO of Viacom. These three companies' boards pay CEOs above the median of the company’s self-selected peers. Getty Images

"In the 1970s, companies recruited and rewarded CEOs like bureaucrats, but with the implementation of stock options they started recruiting and rewarding CEOs like entrepreneurs," he said at the Human Resources Policy Institute, a partnership of Boston University's School of Management and human resources executives, in May 2007. "It is this change that has fueled economic growth." The 55 big-company boards that employed Pay Governance awarded their CEOs $712 million in 2012, according to 2013 proxy filings. Most is what Kay calls "opportunity pay" — stock and options dependent on a company's future performance, as presented in the annual proxies' summary compensation tables. A separate calculation by Greg Ruel, a senior research analyst at governance consultant GMI ratings, shows the executives took home an eye-popping $845 million in "realized" compensation, combining salary, bonus, pension contributions, perquisites and the market value of vested stock and exercised options. DirecTV CEO White, who is employed by one of Kay's big-company boards, was granted $18 million in 2012 and realized $50.8 million, buoyed by a 50 percent rise in the broadcaster's share price during his three years on the job. Read More

Kay is paid handsomely, as well, though Pay Governance is privately owned and does not disclose principals' earnings. At his former employer, Watson Wyatt & Co., Kay made $865,390 a year and owned company shares worth $2.4 million, according to the firm's last disclosure on Kay in October 2006. Now, as one of three managing directors at Pay Governance, Kay oversees a firm that collects anywhere from $39,717 in consulting fees from Xcel Energy in 2012, according to the utility company's proxy, to 10 times that amount, $399,477 from Computer Sciences. Last year, Computer Sciences said it had replaced Pay Governance with rival compensation consultant Pearl Meyer & Partners; Xcel hired Meridian Compensation Partners. Kay, who managed neither account, told me he personally handles more than a dozen large clients, some won recently, such as Morgan Stanley and McGraw Hill. Standing in opposition to Kay at the debate that January morning was Charles Elson, director of the John L. Weinberg Center for Corporate Governance, whose courtly etiquette and lazy eye, or amblyopia, disguise the steely resolve with which he has clashed with corporate leaders and their consultants for decades. During the Enron debacle, he may have been the most over-quoted conscience in America. Beside him was a frightened-looking graduate fellow, Craig Ferrere, who had proposed the published paper that was the subject of the day's argument: "Executive Superstars, Peer Groups and Overcompensation." Elson and Ferrere contend markets aren't deadly efficient pricing guns for talent and boards aren't pocket holsters for management, but the practice of benchmarking CEO compensation to the median of a peer group has an "upward bias" – a ratchet effect – that lifts the boss's pay over time. As incomes rise for top performers, median comp goes up for slackers, as well. Read More

Benchmarking originated after World War II when Milton Rock, a partner at one of Ira Kay's first employers, the Hay Group consulting firm, produced an encyclopedic classification of managerial descriptions that made mid-level talent comparable across industries. Boards and compensation consultants appropriated this transferability-of-talent concept to support the CEO "superstar theory: a great manager can run any company," Elson said at the debate. Yet because CEOs rarely change jobs, boards should focus on internal metrics for evaluating the leader, and enforce pay equity up and down the line, rather than rely on outsiders as proxies for a competitive market, he said. "Pay awarded to chief executives is becoming profoundly detached from not just the pay of the average worker, but also from the companies they run," Elson argues. Opportunistic peer selection raised CEO pay by $1.2 million at the median in 2007, according to an analysis by business scholars Michael Faulkender at the University of Maryland and Jun Yang at Indiana University. Lesser-paid CEOs benefit by getting lumped in with higher-paid peers, the academics found, drawing on new details about the composition of CEO peer groups the Securities and Exchange Commission required from annual proxy filings beginning in late 2006. "The pay differences are always greater in firms with weak corporate governance than in firms with strong corporate governance," academics Faulkender and Yang concluded.