What’s wrong with this picture? The board of directors of ITT Corp. voted recently to double the compensation of its chairman, Rand Araskog, to $9.7 million. Yet ITT’s financial performance over the past decade has been spotty and its stock price has lagged. To critics like the California Public Employees’ Retirement System (CalPERS), a major stockholder, ITT is just one example of a runaway executive-pay system. What annoys critics is not only that the peak annual salary drawn by a U.S. CEO has rocketed from below $l million to as much as $35 million in little more than a decade. It’s also that many CEOs have been showered with such largesse while the fortunes of their shareholders have languished. Says Richard Koppes, general counsel of CalPERS: “ITT is one of the worst-performing shares in our portfolio. Imagine what Araskog will be worth if ITT ever does well.”

Why does this happen? One answer might be found by looking at the board of directors. After approving Araskog’s pay, the ITT directors completed a double whammy, according to CalPERS, by drawing an average of $94,000 each in 1990 for their part-time jobs. Graef Crystal, a pay consultant advising CalPERS, says studies show that this pattern repeats itself at scores of high-pay corporations. Boards, often selected with some influence by the chief executive, vote bonanzas for their bosses, and then, with the happy chairman looking on, vote a bonanza for themselves.

Such criticism of the 1980s pay boom has had little dampening effect. During last year’s recession some executives did take hits on their salaries (chart). But overall CEO cash pay at 352 companies surveyed by consultant Towers Perrin still rose by 6.7 percent in 1990, to an average of $981,200. Stock options and other fringes added $400,000 on top of that. By contrast, CEO salaries rose by only 2 percent during the last recession, in 1982.

Michael Halloran of Towers Perrin argues that a lot of the pay rise in the ’80s was justified. “Stock values and corporate profits soared,” he says. “The managers were just getting their cut.” Many of the big pension funds agree. “We really don’t argue with the $10 million-plus pay scales of Michael Eisner at [Walt] Disney or Roberto Goizueta at Coca-Cola. Their shareholders made billions,” says Nell Minow of Institutional Shareholder Services.

But within the last year, for the first time, the large pension funds in California and New York are openly challenging highly paid executives at low-performing companies. “We own about 1 percent of every big company in the country,” says Koppes of CalPERS, which invests $60 billion. “We used to take the ‘Wall Street walk’-just dump the stock. But high pay for low performance is systematic. We’re so big we’ve got to stand and fight.”

ITT vigorously defends Araskog’s pay and its directors’ fees. It argues that Araskog over the last decade has completed a difficult restructuring of the sprawling $20.6 billion-a-year conglomerate, with the payoff now at hand. And ITT directors, says the company, work harder and more actively than most. CalPERS is skeptical–but willing to listen. And it’s going to get the chance. In response to CalPERS’s broadsides, ITT is sending CFO M. Cabell Woodward Jr. this week to Sacramento to argue its case directly. To the critics, that’s a start.

Here’s a sampling of corporate heads who got big raises last year, and others who took big hits.

TOTAL SALARY AND BONUS Pay Raise 1989 1990 Philip H. Knight, Nike $255,841 $542,758

Scott G. McNealy, Sun Microsystems $781,377 $1,406,600

Lee A. Iacocca, Chrysler $889,151 $1,527,974

Pay Cut 1989 1990 S. Parker Gilbert, Morgan Stanley $7,500,000 $2,750,000

Harold A. Poling,* Ford Motor $2,148,594 $1,221,339

Barry F. Sullivan, First Chicago $1,460,824 $735,632