(FORTUNE Magazine) – On Jan. 13, employees of Agere Systems, the $1.9 billion semiconductor maker that spun off from Lucent in 2002, arrived at work to find a letter from CEO John Dickson in their in-boxes. A typical executive missive laced with platitudes and puffery? Hardly. The letter detailed Dickson's $3.6 million compensation package for 2003, including his $640,000 salary (he took a voluntary 20% cut last year), $600,000 bonus, $1.7 million worth of stock options, even the $313,837 that the British-born CEO received to relocate to Agere's headquarters in Allentown, Pa. "It is important for me to be up-front about this," Dickson wrote. "You have a right to know what our company's top executives are being paid."

If only more CEOs felt the same way. While Dickson's disclosure was admirable (and his pay relatively low), it represents but a small and infrequent step in the long, mucky slog toward more rational executive compensation. Despite last year's loud cries for reform, plenty of boards are still paying their CEOs like it's 1999. That's the message from our analysis of 2003 CEO pay, conducted with the help of Equilar, an independent provider of compensation data in San Mateo, Calif. The median CEO compensation at the 363 FORTUNE 500 companies that had filed their proxies by April 7 was $7.1 million--2.6% higher than last year's median. Among the very biggest companies--those in the FORTUNE 100--median pay was nearly twice that: $12.2 million. Granted, FORTUNE 500 profits were five times larger in 2003 than in 2002. But let's not forget how high 2002 pay was. That year the average U.S. CEO earned 282 times what the average worker did, a survey shows. In 1982 the ratio was 42 to one.

Frustrated shareholders want to know: Why is pay reform taking so long? There are several reasons. Regulators, busy cleaning up the mess in corporate accounting and the mutual fund industry, have focused on executive compensation only in fits and starts. Too few shareholders have expressed their ire in the proxy ballot box. Some reform-minded corporate boards are hamstrung by their CEOs' multiyear employment contracts. And far too many boards are still spineless.

So we continue to see pay packages that defy explanation (see table). Take Larry Culp, the CEO of Danaher. Dana-who? The company makes Sears' Craftsman tools, among other things, and its market value of $14 billion is one-twentieth the size of Microsoft's. Culp, who has been CEO since 2001, received a pay package worth $53 million in 2003. That included a $27.3 million grant of stock, a prize so special that it's named after him: the "Culp Performance Share Award." He earns the award if (a) he keeps his job until Dec. 2009, and (b) Danaher finishes four consecutive quarters with diluted earnings per share (EPS) 10% higher than the four quarters ended March 2003. (He has until 2009 to do so.) It helps to know that Danaher's EPS has increased an average of 36.3% every year since 1993. If that's a performance bar, a Smurf could clear it. A Danaher spokesperson defends the package, saying that Culp has boosted the company's market value by $6 billion since he started as CEO.

But still. Culp's pay was almost six times more than that of our 12 lowest-paid CEOs combined (see table)--a group that includes Berkshire Hathaway's Warren Buffett, Microsoft's Steve Ballmer, and Kinder Morgan's Richard Kinder. Not exactly Larry, Moe, and Curly. (Don't shed too many tears for the low-paid guys, however. Some are company founders with huge ownership stakes, while others--UAL's Glenn Tilton, Continental's Gordon Bethune, Mohawk's Jeffrey Lorberbaum--head struggling firms in profit-starved industries and thus probably deserve what they got.)

What really changed in 2003 was the composition of executive comp. So-called megagrants of stock options are now taboo because of increased shareholder activism and impending accounting changes that will require stock options to be expensed on income statements beginning next year. (You may recall that Microsoft announced last summer that it would dispense with options entirely.) The value of option grants was therefore down 14%, according to Equilar.

But every other form of compensation--salary, bonus, restricted stock, long-term payouts, and assorted perks--has increased. Bonuses were up 17.7%, as you might expect in a year when profits at FORTUNE 500 firms rebounded dramatically. But the most popular alternative to stock options was grants of restricted stock, which increased 17.3% last year to a median of $2 million, according to Equilar. Many companies just doled out simple time-based restricted stock, which vests as long as the CEO keeps breathing. It's not pay for performance; it's pay for attendance.

Look at Apple CEO Steve Jobs' mammoth $74.8 million pay package --most of which we reported in last year's pay survey because in March 2003 he made the unusual move of trading in 27.5 million underwater options for five million shares of restricted stock (see "Have They No Shame?" on fortune.com). His package consisted entirely of that restricted stock, except for a buck in salary. Lou Camilleri at Altria got almost $13 million in restricted stock with no strings attached (total comp: $23.9 million). Says George Paulin, CEO of compensation consultancy Frederic W. Cook: "This is a step backward."

Have any companies adopted more enlightened compensation practices over the past year? A few. For example, last fall General Electric adopted a tough performance-based pay plan for CEO Jeff Immelt. GE granted him 250,000 "performance share units" (a unit is equal in value to a share of stock) with a market value at the time of $7.5 million. But he gets half of them only if he grows operating cash flow by 10% a year, on average, from 2003 to 2007, and the other half if GE's total shareholder return for that period meets or beats the S&P 500's.

GE also kicked Ken Langone, a bete noire of shareholder activists who played a lead role in former NYSE CEO Dick Grasso's $140 million payday, off the board's compensation committee. (He's still a director.) And the company gored a sacred cow: golden parachutes for departing CEOs. They averaged $16.5 million in 2002, according to the Corporate Library, a research firm that advocates boardroom reform. Now GE requires shareholder approval for cash severance payouts of more than three times the senior executive's salary plus bonus. So does Verizon.

In part because the NYSE and Nasdaq now stipulate that corporate boards' compensation committees (who approve executive pay) must be composed entirely of independent directors, "boards are taking much more active interest in executive compensation," says Don Delves, an independent compensation consultant. He says that he is now hired mainly by corporate boards rather than by management--a sea change for the industry. Pay committee meetings that used to last 25 minutes now go on for hours, with directors demanding to learn about all aspects of a particular pay plan.

And yet even the best of board intentions all too often come to naught. Consider SBC Communications. Ed Whitacre, 62, is one of the best-paid CEOs in telecom--in 2001 alone he raked in $83 million. In 2002, the company's profits sank and the stock plummeted 30%. In 2003, Jim Henderson, the former CEO of Cummins and new chairman of SBC's compensation committee, took the board's compensation consultant aside and "made it very clear that he worked for us [rather than for the CEO]," Henderson recalls. He hired a second compensation consultant to check a proposed new pay plan for top execs. That plan, which eschews stock options and restricted stock and places a premium on performance, will take effect this year.

Sounds pretty good, right? Not when it comes to Whitacre. SBC's board chose not to alter the company lifer's five-year employment contract, which was negotiated in the heady days of early 2001 and guaranteed that the CEO's salary, bonus, and long-term pay targets would never go below 2001 levels. "We took a careful look at whether or not to change his contract but we decided not to," Henderson says. "He's done a good job in a tough environment." The result: Whitacre's pay totaled just under $30 million last year even as the company floundered. Nothing much will change until Whitacre retires--which won't be soon, as his current contract takes him through 2006.

This is hardly an isolated phenomenon. The average big-company CEO contract lasts about three years, according to Equilar president Tim Ranzetta, but most are renewed automatically for another year toward the end of the term. So they can go on and on, like a bad movie. What's more, changes to such contracts--such as a reduction in salary--usually cannot be made without the CEO's consent.

Activist directors like Henderson are still in the minority. One pay consultant says that only about 15% of corporate boards are taking a much more aggressive stance on pay. The MBNA board is clearly not among them. Last November CEO Chuck Cawley announced his retirement at the end of 2003 after reportedly disagreeing with the conclusions of a new compensation consultant the board hired last fall. (The consultant had the gall to recommend freezing salaries and chopping bonuses for senior executives.) That didn't stop the board from handing Cawley a $52 million pay package in 2003, which made him one of the top-paid CEOs in the land. The largesse included $16.8 million in stock options that vested immediately (why wait?), a $4.5 mil-lion bonus, and $27.3 million in restricted stock, a chunk of which was granted in January 2003 as an "incentive to remain with the company." Guess it didn't work.

MBNA's cozy comp committee even has a subcommittee called the "stock option committee," apparently because doling out stock is such a time-consuming task that it requires special focus. MBNA's board justifies Cawley's pay in the proxy by stating, "The corporation's results have been so consistently outstanding over the years that the effort needed to produce those results might not be apparent." In other words, Cawley is so darn good, you can't even tell how good he is.

Another reason progress has been slow is that the SEC has not demanded any improvements to executive compensation disclosure in a dozen years. In 1999 the commission hired a man named Mark Borges to look into ways to improve disclosure on proxy statements. Such disclosure leaves much to be desired--especially when it comes to explaining hidden payments like supplemental executive retirement plans (SERPs) and deferred compensation. But Borges says the project was put on the back burner in 2000 and little has been done since. Paula Dubberly, an associate director at the SEC, will say only that the commission is "considering whether updates or revisions [to current pay disclosure] are appropriate." To its credit, the SEC has proposed allowing large shareholders to nominate their own board members under certain conditions. But progress has been glacial: The SEC first looked into this in 1942.

Individual shareholders are also to blame. They often complain about CEO pay but then fail to voice their opinions come proxy season. A shareholder proposal to put a ceiling on executive pay and bonuses at Tyco, for example, garnered a measly 6% of the vote at the company's shareholder meeting earlier this year. Tyco's management said the proposal would hinder recruitment. But that's the attitude that got us into this mess in the first place.

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