(FORTUNE Magazine) – The latest plan to rein in executive compensation is simple: Make it easier for companies to pay top honchos more than $1 million a year.

Counterintuitive as that may seem, it's exactly what a group of powerful business leaders and reformers, including former Secretary of Commerce Peter G. Peterson and former SEC chairman Arthur Levitt, are proposing. So far, however, the idea has gained more support from executive-compensation watchdogs than the legislators who would have to approve it.

A commission established by the Conference Board, whose members include Levitt and Peterson as well as former Fed chairman Paul Volcker, has roundly criticized the 1993 federal tax law that bars a public company from deducting cash compensation in excess of $1 million to any of its top five executives--unless that pay is tied to hitting specific performance goals.

In theory capping non-performance-based pay makes perfect sense. The problem: Stock options were deemed "performance based" compensation exempt from the $1 million cap. And under current accounting rules, options aren't expensed on a company's income statement and the company even gets a tax deduction when executives exercise them. Once the $1 million cap was put in place, companies began to dole out options in record numbers, and thanks to the soaring stock market, executives hit the jackpot. In 1991 the average large-company CEO earned about 140 times the pay of an average rank-and-file worker; today it's more like 500 times. Pay for performance? Hardly. As FORTUNE reported last September, top executives at the worst-performing companies in America managed to cash in an astounding $66 billion in insider stock sales, thanks to those generous option grants.

Though the falling market has rendered barrels of options worthless, companies have simply given larger and larger grants at lower and lower prices. According to a survey by New York City--based compensation-consulting firm Pearl Meyer & Partners, the number of options granted to top executives by large companies increased by a range of 12% to 20% in 2001.

Proponents of removing the cap say that companies wouldn't have to rely so heavily on stock options to pay executives. Executives, in turn, wouldn't be so hellbent on doing whatever it takes--including manipulating short-term earnings--to meet Wall Street's expectations, meaning fewer nasty surprises for investors. In a February report, staff members of the Congressional Joint Committee on Taxation recommended removing the $1 million ceiling. But one congressional aide, who spoke to FORTUNE on the condition of anonymity, said that popping the cap doesn't have any hope of passing the "political correctness" test on the Hill. Indeed, when former Republican Senator Phil Gramm proposed such a move to fellow Senate finance committee members in July 2002, insiders say he was virtually laughed out of the room.

Peterson, who is also chairman of investment firm Blackstone Group, hopes that other recommendations for limiting executive compensation will gain more traction. They include tying a higher proportion of pay to long-term company performance, expensing stock options, and requiring executives to hold on to their company stock for longer periods of time. "I'm confident that a year from now, you're going to see major progress," says Peterson. When it comes to executive compensation, that would certainly be a first. --Janice Revell