Exorbitant executive compensation is widespread in corporate America, but telecom executives as a group are the worst offenders, according to a recent study by The Corporate Library. Of 11 companies identified by TCL as having the biggest disconnect between shareholder returns and CEO compensation, four — or more than a third — were telecom companies: AT&T, BellSouth, Lucent Technologies and Verizon Communications. No other industry had nearly as much representation on the list.

For example, Verizon CEO Ivan Seidenberg's total pay has grown 45% in the last five years while his company's stock lost about a third of its value. Last year, his total pay went up 48% while the stock fell 26%. A New York Times story this month embarrassed the firm by questioning the objectivity of its executive pay consultants, Hewitt Associates, which also counts Verizon as one of its biggest customers.

The listed companies can't blame their problems on the overall telecom sector, as all four underperformed their peers, said Paul Hodgson, TCL's senior research associate and the report's author.

Hodgson attributes telecom's pay/performance gap to both a troublesome groupthink and a variety of bad company-specific policies. For example, to reward good performance, BellSouth awards stock based in part on total shareholder returns compared to the S&P 500 Integrated Telecom Service Index. But in 2004, when BellSouth underperformed the index (-8.1% to -6.4%), the company still delivered 80% of the award, giving CEO Duane Ackerman alone more than $2.3 million in stock.

When AT&T uses other companies as guides for its own executive compensation, it adjusts for firms of varying size but not varying performance levels. It's therefore possible for CEO Ed Whitacre to be paid more if those other companies execute well. AT&T says it is bound to a five-year contract that Whitacre signed with SBC Communications in 2001, when competition for experienced telecom executives mushroomed. Hodgson said telecom companies as a whole focus too much on history and high-priced peers when setting pay levels and not enough on performance. For example, when Pat Russo became Lucent CEO in 2002, she was guaranteed, among other things, a $1.8 million first-year bonus. After setting such a tone, Hodgson wrote, any attempt by the board to base her pay strongly on performance “would have seemed churlish.”

“[Telecom companies] got locked into a mindset that told them they had to continue to pay very high compensation levels to their executive officers, otherwise they'd be poached by other companies,” Hodgson said. “That may have been the case [in 2001] but probably isn't the case anymore.”

These companies have made some improvements in this area, Hodgson said. In 2004, AT&T changed the metric for its performance share plan from net income to return on invested capital. Lucent shareholders voted this year to rein in executive pay in two ways, tying at least 75% of executive equity awards to transparent performance metrics and excluding pension credits from calculations of performance pay. But the move becomes moot through Alcatel's proposed acquisition of Lucent. And AT&T's efforts haven't been enough, he said.

Next month Verizon shareholders will vote on two proposals aimed at curbing what the authors — company retirees — call “awarding millions of dollars for mediocrity.” One proposal would tie executive pay more closely to performance, while another would require two-thirds of the firm's directors to meet formal independence requirements. The group is confident of the upcoming vote, having successfully passed proposals in each of the last three years. In a statement issued this month, the group said its 111,000 members are “mad as hell and aren't going to … take it any more.”