Shareholders in

Qwest Communications

(Q)

took a beating in 2001. The stock, which began the year at $40.88, finished at $14.13, a 65% decline.

But CEO Joseph Nacchio didn't share that pain. The company raised his salary in 2001 to $1.2 million from 2000's $860,000. And his total compensation for the year came to $102 million, including $75 million from exercising stock options and $24 million in long-term incentives dating back to 1997. Oh, and the company awarded Nacchio an additional 7.3 million new options to keep him focused on running the company in the future.

Qwest points out, rightly, that a good portion of Nacchio's compensation for 2001 -- some of the stock options and the long-term incentives, for example -- is actually carried over from his earlier years with the company. And that this compensation should be measured against the stock's movement from its initial public offering price of a split-adjusted price of $5.50 in June 1997.

Trouble is, that's pretty much where the stock is trading now.

And, of course, if Nacchio should manage to get the stock price back up from here -- say it appreciates at 10% a year -- his new options would be worth an additional $194 million, according to the company's calculations. Investors, on the other hand, after five years of 10% gains, would be holding shares worth $11, instead of today's $6.83. That's about what the stock traded for in October 1997.

It just doesn't seem fair, does it? CEOs aren't supposed to make out like bandits while shareholders bleed.

Unfortunately, the unfairness isn't limited to Qwest. The compensation system at hundreds of companies provides massive rewards for CEOs and other high executives when times are flush -- and when times are tough.

On paper, of course, the system isn't supposed to work like this. The whole idea of annual bonuses, incentive stock grants and huge options awards to upper-level executives is that these rewards will align managers' and shareholders' interests. Managers will do well personally when they deliver the goods for shareholders. The more a pay package rises and falls with performance, the more incentives a manager will have to perform.

In reality, though, all too often the system seems to deliver higher pay no matter what the company's performance. For example, in 2000, a truly rotten year for U.S. business and shareholders, the median package of salary and bonus climbed by 10% to a little more than $1.8 million, according to a Mercer Human Resource Consulting/

Wall Street Journal

survey of 350 companies.

Serious Harm to the Markets

And even that figure masks the true size of the distortion because it considers only salary and bonus, leaving out the stock options and other awards regularly granted to CEOs as part of their compensation packages. According to the Mercer/

Journal

survey, the median salary and bonus of a CEO in its survey dropped 3% in 2001. But the median realized gain from options in 2001 climbed to $2.1 million. And almost a third of the CEOs in the sample received new grants of options or restricted stock worth at least two times the value of their salary and bonus.

More than just some abstract principle of fair play is at stake here. This system of compensation without consequences has done serious harm to our financial markets over the past decade. These incentives have pushed some conservative managers into taking more risk and bending more rules than they might have otherwise. And they've encouraged the truly reckless to shoot for the moon without regard for consequences. Rather than aligning the interests of managers and investors, this system has encouraged too many managers to think of their shareholders as the suckers who supply the cash -- and who bear the risk.

Not every CEO at every company succumbed to this temptation. It's important to know the difference between black and white, and even between all the shades of gray right now. Duane Ackerman of

BellSouth

(BLS)

made 20% less. James Sinegal of

Costco Wholesale

(COST) - Get Report

took a 33% shave. To be sure, I'm not crying for any of these CEOs -- Ackerman still took home $3 million in salary and bonuses -- but at least these executives made some attempt to share a rotten year. And a few companies did even more. Sidney Taurel, the CEO of

Eli Lilly

(LLY) - Get Report

, took a 49% cut in 2001 and will earn a base salary of just $1 in 2002.

However, the investors who have been burned by this system aren't inclined to discriminate between the companies and managers who exploited the system for all it was worth and those CEOs who tried to play fair. The inclination is to regard the entire system as rotten and walk away from the capital markets in disgust. If investors do abandon U.S. markets, the damage will indeed be profound, and the cynics who justified their own behavior by saying that everybody does it will have won.

That's why pointing out the companies and CEOs who behaved with particular disregard for the interests of shareholders is especially important now. Getting angry at specific and individual targets is an essential step in changing the compensation system and restoring investor faith in the system as a whole.

Five for the Doghouse

So here's my list of the five companies, in alphabetical order, that, on the evidence of their own filings with the

Securities and Exchange Commission

, showered their CEOs in riches in a way that did the most damage to shareholders. I don't claim it's a scientific list, and it's not based on pure mathematics. I've given extra "points" to companies that have put in place compensation policies that are especially likely to work against shareholder interests. And I've given extra weight to situations where the companies have been particularly arrogant about defending their practices.

American Express

(AXP) - Get Report

: 2001 wasn't exactly a great year for American Express: Shares fell 35%. That's why it's so surprising that the company decided to ignore its own performance guidelines and give CEO Kenneth Chenault $5.9 million in cash (salary, bonus and long-term incentives), plus $8.3 million in restricted stock and $17 million in options. The company's proxy statement reads like a list of excuses for why the CEO and the company didn't achieve its goals in 2001. Granted, no CEO could have anticipated the terrorist attacks of Sept. 11, but the blowup in the high-yield bond portfolio at American Express is exactly the kind of event a CEO is responsible for. Why set performance guidelines and link them to pay at all if you're going to abandon them so quickly?

EMC

(EMC)

: It's especially dangerous to set up a compensation system that rewards a CEO with more options as the company's stock price sinks. That's exactly what EMC -- down 79% in 2001 -- wound up doing for CEO Joseph Tucci.

Tucci started off 2001 with a January grant of 400,000 options carrying an exercise price of $72.31. As the stock sank toward its current price of less than $10 a share, though, it was clear that these options were likely to stay

out of the money for a long time, perhaps forever. So on April 18, the company awarded Tucci another set of options -- 1 million this time, with a strike price of $36.11. Tucci now would do quite well personally even if the stock never approached its former highs. This seems to have made the company's compensation committee a little nervous, so it added some strange wrinkles to this round of options. For example, 50% of the options will become exercisable if the common stock climbs to $73.22 -- the approximate strike price of the first set of options -- for 10 consecutive trading days on or before April 18, 2004.

But $36.11 also turned out to be an unrealistically high strike price for EMC stock. So on Oct. 19, 2001, the company gave Tucci a third grant of 2 million options with a strike price of just $11.51. Now if the stock bounces back to just $21.51, Tucci will make out far better than he would have under the original set of options if the stock had climbed from $72 to $82.

J.P. Morgan Chase

(JPM) - Get Report

: Did J.P. Morgan Chase think shareholders wouldn't be able to do the math? First, the compensation committee cut the bonus of CEO William Harrison to $5 million in 2001 from $5.3 million in 2000, while keeping his salary at $1 million. That's a 6% bonus reduction, "reflective of the shortfall in earnings compared to budget and prior year," according to the board. It's still generous, given the 17% decline in share price that J.P. Morgan suffered in 2001, but at least it's an attempt at keeping CEO and shareholders in rough parity.

But then in July the compensation committee decided to give Harrison a special $10 million cash award -- along with 237,000 shares of restricted stock -- for his role in implementing the merger between J.P. Morgan and Chase. That brings Harrison's bonus for the disappointing 2001 to $15 million -- well above the $5.3 million in 2000. Some slap on the wrist for an earnings shortfall, huh?

Qwest Communications: Here's the last straw for me. The company has moved its annual meeting from Denver, the company headquarters town, to Dublin, Ohio. Guess that will cut down on the number of embarrassing questions from company employees, like the one who recently asked Nacchio why the board hadn't fired him yet.

Tyco International

(TYC)

: CEO Dennis Kozlowski took down a salary of $1.7 million and a bonus of $4 million in 2001, a rather hefty 35% raise for the head of a company that saw its income growth and stock price appreciation grind to a halt. But it's all the extras, and not the 35% raise, that earn Tyco International a place on my list. Biggest items: the $31 million in restricted stock (about 50% more than in 2000), $4 million to buy life insurance and 1.4 million options to replace options that he'd exercised.

And there's nothing to suggest that Tyco International's compensation policy is about to get more shareholder-friendly: On Jan. 22 the company gave Kozlowski 800,000 shares to vest in equal 100,000 lots each January. The shares can be immediately sold back to Tyco, and they are not tied to performance in any way. All Kozlowski has to do to earn them is stay with the company. On Jan. 22 the first 100,000 shares to vest were worth $4.8 million.

The CEO Cult

You'll notice that many of the biggest payouts of 2001 -- such as

IBM

(IBM) - Get Report

CEO Louis Gerstner's $8 million cash bonus and $115 million in realized options gains -- haven't made my list. That's because arguably these huge packages are linked to outstanding company performance and shareholder gains. There is, in other words, a case to be made to justify this level of compensation.

But it is a case subject to challenge. The cult of the superstar CEO that dominated the last decade -- and the huge pay packages it engendered -- is quite possibly responsible for some of the worst accounting excesses of the bubble market. One possibility worth considering is that the excesses of the super-CEO bubble will add months or even years to the current investor preference for small-cap over large-cap stocks.

Jim Jubak appears Wednesdays on CNBC's "Business Center" at 6 p.m. EST. At the time of publication, he owned or controlled shares of the following equities mentioned in this column: EMC.