Companies are under the gun to devise pay packages that reward performance rather than greed.

Michael Kasbar and Paul Stebbins of World Fuel Services: Their pay is tied to long-term shareholder returns--and their personal assets are on the line.

World fuel services is coming off a banner year. As smaller rivals struggled, the Miami wholesaler sold $18.5 billion worth of fuel in 2008 to airlines, ship operators and distributors.

Given the 62% rise in net income, cofounder and Chief Executive Paul Stebbins stands to receive a hefty, yet-to-be-announced bonus. Even so, Stebbins has good reason to focus less on World Fuel's past results than on building future value.

That's because Stebbins' financial well-being, and that of his chief operating officer, Michael Kasbar, are intimately tied to how well World Fuel, and its shareholders, fare in the years ahead. Under its executive pay plan almost all of Stebbins' equity grants are tied to the financial performance of the company and do not vest for a number of years. Restricted stock granted in 2006 is tied to annual net income growth and does not vest until 2011; stock appreciation rights (similar to stock options), also granted in 2006, are linked to three-year earnings-per-share growth and vest only this year. Stebbins also has $23 million, two-thirds of his net worth, tied up in World Fuel stock.

"If something happens to World Fuel, my wife is very unhappy," says Stebbins.

If there's a single issue that has filled Americans with populist rage during the recent financial crisis, it's not the billions of bailout dollars they'll be paying with their taxes. It's that the people at the helms of many corporations that ran aground are walking away with lavish pay.

E. Stanley O'Neal received $223 million for blowing up Merrill Lynch. Chief executive Angelo Mozilo got $103 million, and unloaded $169 million worth of stock, in the year before Countrywide Financial melted down. General Motors shareholders paid Richard Wagoner $39 million for a tenure during which the value of their stock declined 98%.

Even as the public gags, and pay's central role in encouraging destructive behavior has been laid bare, the outrages have continued. One of the latest lavishly paid executives is Sanjay Jha, co-chief executive of Motorola, a company whose board has seemed incapable of righting the troubled firm since well before the financial crisis struck. Its latest brainstorm: Promise Jha $104 million, the market value of his stock and option awards, just for showing up.

Dana Holding Corp., the auto parts maker that emerged from bankruptcy in February 2008, spent $2.3 million last year flying Chief Executive John Devine and his predecessor, Gary Convis, to and from their California homes, according to its latest proxy.

The biggest 100 companies also blew a median $15,600 in 2007 on financial planning for their bosses. Another $29,300 per firm went to personal and home security and $109,800 to personal use of corporate aircraft. Shareholders shelled out $34,400 per company to cover taxes on the perks, figures executive pay researcher Equilar.

All that's small change compared to stuff like supplemental retirement pay and severance benefits. Talk about pay that an executive will not perform for: Disney shareholders are on the hook to shell out $4.5 million to Robert Iger's heirs after he dies.

The problem is not that big corporations pay big. It's that the pay is so tenuously tied to creating lasting shareholder wealth. In our annual pay-for-performance survey we rank chiefs who have delivered for their shareholders and those who have been duds.

Creating a pay system with the right incentives is a tricky business. It may make perfect sense for a tech startup, with a single shot at making it into the big leagues, to offer its boss big incentives to swing for the fences. Shareholders in a utility may be most interested in incentives that encourage the boss to deliver a dull but steady stream of dividends.

David Larcker, who directs Stanford University's corporate governance program, says companies can measure performance one of three ways: by stock price gains (with or without dividends added), by accounting measures (like profit gains) and by nonfinancial indexes like customer satisfaction and employee turnover.

That's the theory. Now look at the mess you get when some details are not attended to. Merck pays Chief Executive Richard Clark twice for raising earnings per share--once via his annual bonus and then again via stock grants. In contrast, PG&E Corp. uses an earnings-per-share hurdle to set its bonus for Chief Executive Peter Darbee. To receive the full amount, he must also meet customer and employee satisfaction targets. Darbee is also entitled to long-term incentives that include restricted stock and performance shares based on the company's total return over the prior three years.

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"A company ought to pick performance indicators for bonus schemes that are consistent with its corporate strategy," Larcker says.

Corporate governance scolds have been parroting such truisms for years. A big part of the problem in the past has been that the executive pay cabal has been as inbred as a clan of kissing hillbilly cousins. Rather than pay for performance, 86% of S&P 500 companies consider what groups of peer corporations pay their bosses. GM's board was not dissuaded merely by a plunging stock price from paying Wagoner millions and instead based his pay in part on how much IBM, Altria and other, mostly more successful, firms paid their bosses.

You get a Lake Wobegon effect: everyone struggling to be paid above average. The result of peer comparisons is that chief executive pay grew from 40 times average worker pay in 1980 to 433 times in 2007. Finally the recession took pay down, but only a little. Median pay in 2008 fell 10% from the year before among the 148 large corporations that had released 2008 proxy statements by mid-April. That is a lot less than the 37% loss of wealth for investors in the S&P 500.

The recipe for rational executive comp is for the board to treat shareholders like owners, instead of patsies, says Paul Hodgson, senior research associate at the Corporate Library. That means limiting pay to reasonable levels, keeping it simple, linking it to performance and disclosing details about how it's measured and why. The good news is that as bad times have piqued interest in good governance, there are plenty of firms, like World Fuel Services, to show how it's done.

"There are companies out there doing things right," says Hodgson. The author of reports titled "Pay for Failure" and "Pay for Success," Hodgson awards points to companies worthy of praise for their compensation practices.

Among those Hodgson slammed last year: Merck, for doubling long-term incentives without lowering any other compensation; Safeway, for enriching pensions merely as a retention lure; and Time Warner, for lavishing long-term incentive pay on a boss during his last year on the job.

Hodgson praises technology company NCR. It recruited William Nuti from Symbol Technologies with a signing bonus consisting of stock and options. The latter vested when NCR hit undisclosed performance targets. NCR's shareholders can't be thrilled that their stock is down 33% this year, but at least they have reason to believe their chief exec's pay depends on orchestrating a turnaround.

As for peer benchmarking, corporate directors need look no further than upscale retailer Nordstrom to see how it's done right. President Blake Nordstrom, great-grandson of the founder, receives a portion of his pay in performance shares that vest three years after they're granted and then only if the company's total shareholder return is positive and above average among its retail peers. Call it enlightened self-interest; Nordstrom owns 2.7 million shares in his namesake firm worth $59 million.

The compensation committee at Sealed Air, the bubble-wrap maker, last year indicated that its stock price was too volatile to form a sound basis for setting Chief Executive William Hickey's bonus. Instead, it laid out ten goals it figured Hickey could better control, including targets for diluted earnings per share, net profit, return on assets, safety and manufacturing quality. The committee narrowed the field in 2008 to operating income, sales and safety. Hickey got no bonus.

Often what a company doesn't pay is as revealing as what it does. In "Pay for Success II," Corporate Library's Hodgson gives high marks to insurance broker Aon Corp. for limiting Chief Executive Greg C. Case's severance benefits and personal use of the company jet.

Clawbacks are another governance tool coming into vogue. The Sarbanes-Oxley Act of 2002 stipulated that companies have a right to recoup pay in the event of outright financial fraud. The Securities & Exchange Commission used the law in 2007 to recover $448 million in bonuses, stock sales and stock option gains from former UnitedHealth Group boss William McGuire after the company's options-backdating scandal. UHC adopted its own clawback provisions the same year.

Sixty-four of the largest 100 companies had clawback provisions in place last year. Another 30 of the largest 500 companies have said they adopted clawbacks for the first time this season. Many clawbacks can be triggered by a financial restatement. About the only example of clawbacks' use to date: Warnaco's recovery of $120,000 from three executives following a 2006 restatement.

So-called say-on-pay provisions are also beginning to make their way across the Atlantic from the U.K. Nonbinding so far, they give shareholders a voice in telling directors how they feel about pay packages. In its March proxy Biotech giant Amgen directs holders to an online questionnaire asking whether they believe its pay plan is based on performance and whether the goals are clearly disclosed. Amgen, which used questions written by institutional investor TIAA-CREF, says it will summarize responses on its Web site after its May 6 shareholder meeting.

Prudential Financial this year added a link to its Web site where investors can comment on its pay plan. Many other companies are likely to conduct shareholder polls on pay over the next few months, says Timothy Smith, a senior vice president at Walden Asset Management and a vocal shareholder advocate.

The financial crisis is also exerting pressure on companies to open up pay practices. Roughly 400 firms that accepted federal aid are expected to be required to conduct advisory votes this year on pay plans. Congress may also require all public companies to conduct nonbinding say-on-pay votes.

The tide is clearly shifting. Smith says already this year he has received calls from officials at several dozen firms to discuss pay. A few put directors on the line.

Regulators appear to be lining up, too. The State of Delaware passed proxy access provisions that make it far simpler and less costly for shareholders who are at odds with corporate directors to nominate opposing candidates. The sec is expected to consider similar changes in May to its regulations.