I know complaining about executive compensation is a popular topic of discussion on this board, but I have not seen a discussion of viable strategies to actually reform pay practices. Without going into too much technical detail, I would like to lay out what I see as realistic changes in the law that could actually have a major impact.
1. Impose a hard $500,000 cap on annual cash compensation for executives at public companies. Under the current section 162(m) of the code, companies are not allowed to deduct compensation in excess of $1MM unless the additional compensation is "performance based." The performance based exception became the exception that swallowed the rule, making 162(m) largely inconsequentional. In recent years, 162(m) has been expanded to include a hard $500,000 cap on compensation for certain employees (executives at companies that received and did not repay TARP money, and certain health insurers) with no performance based exception, and I think this could easily apply to all public companies. To prevent companies from just taking the tax hit (the penality for violating 162(m) is just that the employer does not get to take a tax deduction for the amount in excess of the cap) the Nasdaq and NYSE listing criteria should be amended to require companies to solicit shareholder approval of any payment of compensation which would not be deductible, and to delist any company who makes a nondeductible payment without obtaining shareholder approval.
2. Tax options, restricted stock awards and other forms of restricted equity on grant, and again at sale. Under the current system (largely governed by section 83 of the tax code), you are not taxed on the grant of options, even though they are securities with a value that can be determined (normally, we use the black-scholes value). When you exercise those options, you are taxed on the value of the options (less the exercise price you pay) and then you are taxed again when you sell them. Restricted stock and other forms of restricted equity are normally taxed once the restrictions lapse, and then again when you sell them, although we allow people to elect to be taxed on the value at grant (usually at or close to zero) to avoid paying tax on vesting. If we required taxation at the time of grant, vesting and exercise for all equity awards (and allowed deductions if you forfeited your award) and prohibited the current practice of allowing "cashless exercises" by effectively selling some shares back to the company in exchange for having the company pay the exercise price of the remaining options, then we would make it much harder for people to accept huge equity awards (these equity awards account for much of increased executive pay).
3. Apply eligiblity nondiscrimination rules similiar to the rules that apply to pension and 401(k) plans to nonqualified deferred compensation plans and equity plans. This would mean that if a company wants to allow executives to defer their income or wants to grant equity awards, it would also have to extend those opportunities to the majority of employees. I don't think that we would want to apply benefit nondiscrimination rules to these plans (since these plans are not conferring the sort of profound and very expensive (to the government) tax benefits that pension and 401(k) plans do) but requiring everyone to have access to the plans would really help bring ordinary employee compensation more in line with executive compensation from a structural perspectve.
4. Revise the golden parachute rules to require that all recipients of golden parachutes waive the right to receive amounts in excess of the statutory limit if not approved by shareholders. This is already how golden parachutes work in practice at private companies (executives are asked to waive their rights, pending shareholder approval), but not at public companies (which just take the tax hit, and even pay the executives extra money to pay the excise taxes). The golden parachute rules should also apply to all severance payments, not only severance payments made in connection with a sale or other change in control of the company. Like 1, above, the Nasdaq and NYSE listing criteria should be amended to delist any company who makes a nondeductible payment without obtaining shareholder approval.
These are not the only possible changes, but, with the exception of (2), they are all just applications of existing rules to broader classes of executives, and each of them would be pretty difficult to structure around, since even if companies wanted to gross up their employees so that the executives don't feel excise taxes, they would have to count that amount towards the $500,000 cap from (1). I have not included as many reforms for private company executive compensation, which is both a more difficult issue to deal with (private companies are subject to less regulation and oversight than public companies) and in a sense, less pressing (since executive compensation decisions at private companies tend to be made in close consultation with the owners). I am happy to go into more detail on any of the above, or to explain why other solutions may or may not work.