or corporate directors and chief executives, 2001 presented a test: were they really willing, in a down year, to link executive pay to corporate performance?

Just as the nation's top executives received fat raises during the 1990's boom, those who had tied pay to their companies' results were almost certainly going to receive leaner paychecks last year, when profits suffered their worst annual decline in decades. But in the clubby culture of the boardroom, many executives also knew that they could convince their directors to overlook the bottom line and keep the raises coming — if the directors had not already taken it upon themselves to look the other way.

The results were a split decision: Companies divided into two roughly equal-sized groups. The first half, which appears to believe in paying for performance, cut the pay of the top executive for the first time in years. The other half, which seems to believe simply in paying a lot, reacted to a year of recession and war often by creating the impression they had reduced pay without actually doing so.

At Boeing (news/quote), Eli Lilly and nearly every large brokerage firm, executives and shareholders suffered the financial consequences of a disappointing year together. By contrast, Kenneth I. Chenault at American Express (news/quote), Douglas N. Daft at Coca-Cola (news/quote), John T. Chambers at Cisco Systems (news/quote) and top executives at many other companies received big raises or bonuses even though they had missed the goals they had set for themselves at the start of the year.

Mr. Chambers, with a pay package of $154 million for the fiscal year ended June 30, finished at the top of a pay survey of 200 large companies conducted for Money & Business by Pearl Meyer & Partners, a consulting firm in New York. For the calendar year, Richard D. Fairbank of the Capital One Financial Corporation (news/quote), made the most — $99.7 million.

Over all, the average compensation for chief executives declined 8 percent, to $15.5 million, as the tough economic conditions wiped out many of the truly enormous paychecks, the survey showed. It was the first decline in nine years, Pearl Meyer said.

But as the largest awards became smaller, pay for the typical chief executive continued to climb. The median compensation rose 7 percent — about twice the raise that the average American worker received — to $9.1 million, at the 200 companies. Profits fell 35 percent at the typical company.

"This was a year of separation," said Patrick S. McGurn, the director of corporate programs at Institutional Shareholder Services, which advises large investors. "We separated the pay-for-performance folks from the pay-for-failure folks."

The median base salary jumped 4 percent in 2001. Many boards also made up for declining bonuses, which are often directly linked to results, by awarding more valuable packages of stock options and more shares of stock. In some cases, directors called the awards "retention grants," meant to keep executives in place for the next few years.

Pay experts said external events played a role in determining last year's compensation packages, as executives had reason to avoid appearing greedy. "Political pressure had a huge impact on bonus decisions and salary decisions," said Jannice L. Koors, a vice president at Pearl Meyer.

As a recession weakened the American economy, chief executives oversaw the elimination of many of the one million jobs lost last year. In the weeks after the Sept. 11 attacks, the recession worsened and executives joined policy makers in saying Americans would have to make sacrifices during tough times.

The managers of mutual funds and pension funds, meanwhile, along with other large institutional investors, stepped up their criticism of stock option grants last year, saying they were badly diluting the stakes of existing shareholders. By the final month of 2001, executive pay occupied arguably its largest place in the public debate in almost a decade, after people learned that many Enron (news/quote) executives had made millions of dollars as their company was collapsing and that rank-and-file employees had lost their life savings.

"Boards are asking, `Would this embarrass us?' " said Ira T. Kay, the director of the compensation practice at Watson Wyatt, the consulting firm. "They are incredibly sensitive."

 
Many companies reacted in the most straightforward way possible: they cut executive pay. Some reduced the amount of stock and options they gave to executives, and others simply stuck to the formulas they had created to calculate performance-based pay.

"These plans are doing what they were designed to do — paying for performance," said Peter T. Chingos, the top pay consultant at William M. Mercer.

Although their compensation remains huge by any standard, executives of such companies took a significant reduction in pay. David H. Komansky, the head of Merrill Lynch (news/quote), received $18 million, down 53 percent from 2000. F. Duane Ackerman of BellSouth (news/quote) made $14.2 million, down 19 percent. James D. Sinegal of Costco Wholesale (news/quote) made $3.3 million, one-third less than in 2000.

In all, one out of every five chief executives received no bonus in 2001, according to Pearl Meyer. The typical bonus fell 23 percent.

"It's very important that executive pay be aligned with shareholder interests," said Sidney Taurel, the chief executive of Eli Lilly, the pharmaceutical company that makes Prozac and other drugs. "This is the best way to create shareholder value."

Mr. Taurel's compensation fell 49 percent in 2001, to $11.2 million, and for this year he has agreed to take a base salary of $1 and expects neither a bonus nor a stock grant, only stock options, he said. "Since I'm asking sacrifices of everyone," he said. "I thought I should provide an example."

Perhaps others will follow suit. But pay experts said 2001 offered further evidence that the system for determining executive pay is often a rigged game.

Boards typically hire compensation consultants to help set pay, but chief executives usually work closely with the consultants to devise the proposal made to the board. By and large, directors approve the deal, perhaps because the chief executive knows far more about the company than they do or because they themselves are chief executives whose compensation is partially determined by average pay across the top ranks of corporate America. Nearly every company wants to offer its executives "above average" compensation, often in the top quartile of its peers, and that automatically ratchets up the entire scale year after year.

 
MR. CHAMBERS, at Cisco Systems, typified the ways that boards raised pay even as they appeared to be reducing it. He received $268,000 in cash, down from $1.3 million the previous year, as Cisco lost $1 billion and its stock fell 71 percent in the fiscal year ended last June 30. But Cisco's board gave him six million stock options, up from four million in 2000, allowing the estimated value of his pay to climb 32 percent.

Cisco's compensation committee, led by Carol A. Bartz, a technology executive, gave Mr. Chambers the options to keep him focused on the company's earnings, a Cisco spokeswoman said.

Raymond V. Gilmartin of Merck (news/quote) and Richard M. Kovacevich of Wells Fargo (news/quote) also presided over disappointing years but took home hefty raises.

Even some companies that did reduce executive pay still gave more than their initial announcements suggested. When John W. Creighton Jr. took the helm of United Airlines last October, he said he would work without salary for 2001, because the airline's parent, the UAL Corporation (news/quote), was running up record losses, laying off thousands of employees and beginning to ask others to accept pay cuts.

But Mr. Creighton received 400,000 options with an exercise price of $14.48, the share price on Oct. 28. He can exercise the options anytime in the next 10 years, and even if the stock recovers only to its Sept. 10 value of $30.82, they will be worth more than $6 million.

At many companies, chief executives did swallow pay cuts, but other top executives, whose pay attracts far less scrutiny, received raises, according to Executive Compensation Advisory Services, a firm in Alexandria, Va., that analyzes company filings.

The Walt Disney Company (news/quote), for example, failed to reach the goals that Michael D. Eisner, the chief executive, had set. So he received no bonus and $1 million in total compensation, $16 million less than he had received the previous year.

But the board's pay committee, led by Thomas S. Murphy, a former Disney executive, ignored its performance standards for three other top executives — Louis M. Meisinger, Peter E. Murphy and Thomas O. Staggs — and paid them bonuses of $300,000 to $1 million. Because the pay was not tied to performance, Disney lost tax deductions on some of it.

"Sometimes, you have the C.E.O. falling on his sword while protecting the next level of leadership, who could be easily recruited away," said Steven E. Hall, a managing director at Pearl Meyer.

 
Boards that changed their pay standards in midstream often defended the switch by saying they thought the executives had done a good job, and deserved a raise, despite the company's financial results.

"While the company's 2001 financial performance fell short of its long-term objectives," the compensation committee of the American Express board wrote in its proxy statement, "the committee used its judgment about each individual's annual goal and leadership performance to make discretionary awards" as warranted.

For Mr. Chenault, the chief executive, the board's judgment translated into $5.9 million in cash, $8.3 million of stock and an estimated $17 million worth of options.

That kind of policy change upset both small and large shareholders, as well as executives who did take a pay cut. During the long economic boom and bull market of the 1990's, compensation for the typical chief executive soared, and the executives often said the raises were rewards for their roles in creating the boom.

Now, critics say the relationship between pay and performance should also hold in difficult times.

"Our shareholders bore the impact of all that happened last year," said Jon A. Boscia, the chief executive of the Lincoln Financial Group, an investment company based in Philadelphia, and a director at Hershey Foods (news/quote). "They have a right to expect that we, the hired help of the company, are always looking out for their best interests and not our own personal interests."

"We spent time making sure people understood they didn't do a bad job, that it was out of their control," said Mr. Boscia, whose pay fell by more than one-third last year, to roughly $9 million. "But we would be doing less than our fiduciary duty to shareholders if we pretended it didn't happen."

Still, the recent controversy over executive pay at Enron and a handful of other struggling companies could be a turning point, making pay panels more active, consultants say.

In the past, said Gary M. Locke, a co-leader of the compensation practice at Towers Perrin, the management consulting firm, compensation committees tended simply to supervise the pay process, remaining in what he called a "nose in, fingers out" mode. But, he added, "they're definitely putting their fingers in now."

Mr. Kay of Watson Wyatt said he recently attended a board meeting of a company whose stock had dropped significantly. The directors decided not to allow employees to exchange seemingly worthless stock options for actual shares of stock because the board thought the swap would make the company look as if it did not believe in paying for performance.

Other consultants said the compensation committees of a few companies had recently hired advisers to work only with the committee, not with the chief executive. And at least one perk — the sweetheart loans that many boards gave their top executives — may be a thing of the past, because it was a revolving loan that allowed Kenneth L. Lay, the former head of Enron, to sell almost two million shares of company stock quietly.

"Loans are dead," said Frederic W. Cook, who runs a pay consulting firm that bears his name. "You're not going to see them again."

 
OF course, executive pay received similar criticism in the early 90's, when the economy was stagnating. At the urging of a newly elected Bill Clinton, Congress passed a law limiting the tax deductions for pay above $1 million and not based on a company's performance.

It did little to restrain executive pay, however, and as the economy improved, compensation for chief executives took off. Even as the Standard & Poor's 500-stock index fell during the last two years, the raises continued. While the fallout from Enron's collapse could reverse the trend, last year could also end up as a low point for executive raises, because the economy turned around so quickly.

Ms. Koors of Pearl Meyer noted that most companies award stock-option grants in the middle of the year, shortly after they determine the previous year's bonus. In coming months, executives still smarting from a reduced bonus may ask their boards to be generous.

"We may see option grants this year to make up for last year's bonuses," she said.

That, and an improving economy, could return executive pay to its previous, steep trajectory.

"Things will be back to normal next year," predicted Judith Fischer, managing director of Executive Compensation Advisory Services.