CEO pay levels have been set for over a decade using a process that clearly is malfunctioning. This broken process has led to skewed results, for both performing and underperforming companies. And, while good CEOs can make a difference, it still can't hide the fact that some CEOs received their windfalls due to side affects caused by this broken process.

For example, CEOs were provided megagrants of options on an annual basis throughout the 1990s, primarily because boards began to think of option grants as part of the annual routine of reviewing a CEO's pay package - rather than the original purpose of them as one-time grants to proper incentive (we have now called on boards to use "wealth accumulation charts" so they can keep better track of outstanding equity grants and not "overly incentivize" a CEO).

Another example - now widely recognized - is that the commonly used peer benchmark has led to an incredible racheting up of CEO pay as each CEO wants to be paid in the top quartile; thus, creating inflation each year in the benchmark as everyone scrambles to be in the top 25%. Over 15 years, that inflation has gotten quite high. There are many other process elements that are askew, as we have laid out in three issues of The Corporate Counsel, freely available on the right side of www.CompensationStandards.com.

CEO pay is not set like your pay or mine. The process often lacks any real negotiation with the board of directors and CEOs can quite easily get what they ask for. Just because a company has performed well for the past 20 years (as has the entire stock market) doesn't necessarily entitle a CEO to name his or her price. Comparison of CEO pay to big-name entertainment stars has been widely discredited; their pay levels are set by the market - CEO pay levels are not.