CEOs aren't very popular these days. In fact, at least one recent article rated chief executive officers just slightly ahead of used-car salesmen when it comes to being trustworthy. While perhaps humorous to some, this lack of trust-created by Enron, WorldCom, Tyco and others-has created a crisis of confidence in corporate America that will undoubtedly challenge business leaders for years to come. There are many valuable lessons to be learned from the recent corporate scandals and many areas that need to be examined closely-securities analysts, regulators, accounting standards, boards of directors-but the topic that is capturing much of the attention and generating a great deal of debate is executive compensation. What's the right formula, and how much is too much? These are not new questions. Less than 20 years ago management sage Peter F. Drucker cautioned that the growing gap in pay between CEOs and workers could threaten the credibility of leadership. Well, CEOs apparently were not listening. While Drucker suggested that no leader should earn more than 20 times the company's lowest paid employee, a recent Business Week article noted that CEOs of large corporations in 2001 made 411 times as much as the average factory worker. Worse yet, many CEOs have made millions of dollars regardless of the performances of their companies and the returns to their shareholders. Although there are no easy answers, perhaps all can agree that executive compensation is a difficult issue and that excessive greed was a common problem that appears to have existed within all of the large corporations that recently collapsed. Now, don't get me wrong. I'm a strong proponent of the capitalist system and believe wholeheartedly in the ideals of working hard and earning more. However, there are too many examples of executives abusing the system, exhibiting an attitude that excessive pay and perks are simply "rights" that accompany the position. This is dangerous thinking and behavior in that it shirks responsibility and good, old-fashioned business ethics. One of the biggest problems facing corporate America today is the disconnect that exists between the interests of the principals (shareholders) and the interests of the agents (CEO and senior management teams) at many companies. Business schools and corporate leaders for years have been touting the importance of aligning the interests of these two parties, but in truth, that rarely occurs. At Kinder Morgan, we have tried to eliminate that disconnect. As CEO, my salary is $1 a year, with no bonuses, stock options or restricted stock. As a founder and early investor in the company, I own about 20% of Kinder Morgan Inc. (NYSE: KMI). This makes me the lowest paid CEO of any major company in America, according to a Business Week survey, with one of the highest ownership positions in the S&P 500. Importantly, I have never sold even one of the nearly 24 million shares that I own. The message should be clear. First, my compensation is tied directly to the performance of the company. Second, as an owner with a significant personal stake in the company, and with no interest in selling any shares in the short-term, I am able to develop strategies and make decisions based on what is best for the company in the long-term. Isn't that what investors want-to invest in a company that produces solid financial results over the long-term, not just in the short-term? Unfortunately, too many executives have succumbed to various pressures and managed their companies for the short-term, which can be very detrimental to the long-term success of a company. Obviously, my situation as a large shareholder is unique. However, we have tried to align our senior executives and employees' interests with our shareholders as well. At Kinder Morgan, we cap senior executive base salaries at $200,000, well below median industry levels. Naturally, to attract and retain good people, we have to offer financial incentives. Our employees have an opportunity to achieve greater financial rewards through bonuses and stock options, and our senior executives also have received restricted stock. However, we believe strongly in pay for performance, and by that I mean both the company's performance and personal performance. For example, in January 2002 we published our annual budget with an earnings target of $2.58 per share of KMI and a cash-distribution target of $2.40 per unit of Kinder Morgan Energy Partners LP (NYSE: KMP). We reported record earnings at both companies in 2002 and exceeded our budget targets. As a result, our annual incentive plan was funded and generous bonuses were paid to employees, based on their positions and individual contributions. The key point is that if there are any years in which the company does not meet its budgeted financial targets, there will not be any bonuses and our executives and employees won't be reaping as many financial rewards. In January 2003, we once again published our annual budget on our web site (kindermorgan.com) and we will continue to review and explain any variances to the plan during our quarterly earnings calls as part of our ongoing commitment to transparency. KMI also has a small All Employee Stock Option Plan that makes all 5,400 of our employees part-owners of the company, which we believe helps align their interests with shareholders. Clearly, common sense must prevail relative to stock options. For instance, companies do not compensate stockholders to make them whole in a falling market, nor should they re-price or swap stock options for executives whose options are under water. Executive compensation is obviously only part of the equation when it comes to successfully aligning the interests of principals and agents. When KMP was formed in 1997, my partner, Bill Morgan, and I pledged to create a different type of energy company. Our strategy was then, and still is today, to: • Operate fee-based assets that are core to the energy infrastructure of growing markets; • Increase utilization of these assets while controlling costs to maximize internally generated growth; • Leverage economies of scale from incremental acquisitions and expansions; and • Maximize the benefits of the master limited partnership (MLP) financial structure. A real key to our success has been our ability to successfully control costs, which goes far beyond our philosophy on executive compensation. As a pipeline and terminals operator, the overwhelming majority of our cost cuts are at the corporate level, not in the field where safety is our top priority. However, we are very conscious about reducing what we term unnecessary overhead expenses. For example, we don't own corporate jets or fly first-class, we don't produce expensive annual reports, and we don't own suites or tickets to sporting events. Effectively controlling costs, while generating reliable, solid cash flow from our stable assets, has produced outstanding financial results at KMP. Our business strategy was ideal for an MLP, which is required to return virtually all of its profits to its partners each quarter. When we merged with KN Energy in 1999, however, we decided to execute the same strategy at a traditional C-corporation, and we have experienced similar outstanding financial results. Combined, KMI and KMP have an enterprise value of approximately $19 billion, compared with $325 million when Kinder Morgan was formed six years ago. It seems to me that by applying some basic common sense when making decisions and exercising some frugality relative to budgets, corporate America could immediately take a giant step toward righting the ship. While our approach at Kinder Morgan may not be for everyone, it has worked well for us. I believe a primary goal of boards of directors, corporate officers and shareholders across America should be to eliminate, as much as possible, the gap between principals and agents. Despite the trust issue facing business leaders today, and the uncertainty about where the economy is heading in 2003, the United States is still undoubtedly the best country in the world in which to operate the free-enterprise system. Most businessmen and women running companies in this country are honest, hardworking people trying to do the right thing. As a result, over time honest management teams, operating in open environments, should produce transparent earnings and cash flow. The bottom line is that is what it will take to restore the public's trust in corporate America. M Richard D. Kinder is chairman and CEO of Kinder Morgan Inc., which operates more than 35,000 miles of natural gas and products pipelines and over 70 terminals that store and handle refined petroleum products, petrochemicals, coal and other materials.