Last year, while profits lagged and typical investors saw their portfolios drop 12 percent in value, CEOs at top firms got an average 22-percent raise in salary and bonus.

What gives? When CEO pay soars even as corporate performance lags, we get a rare glimpse at one of American capitalism's more instructive secrets: CEOs who cheerlead for market forces wouldn't think of having them actually applied to their own pay packages.

The conceit, of course, is exactly the opposite: Top CEOs rake in more than $20 million on average, we're told, because that's what ``the market'' demands. If you want Michael Jordan in your lineup, you have to pay what it takes to get him.

The reality is that CEO pay is set through a clubby, rigged system in which CEOs, their buddies on board compensation committees, and a small cadre of lawyers and ``compensation consultants'' are in cahoots to keep the millions coming, irrespective of performance.

Here's how it works. Say Amalgamated Widget is looking for a new chief executive to turn around its troubled operations. Once the board settles on a candidate, the candidate's lawyer has a compensation consultant prepare a report showing the salaries and stock packages given to CEOs at similar companies facing comparable challenges. Amalgamated's compensation committee -- usually packed with CEO pals from other firms who are only too happy to see pay spiral upward, since it helps them in their next negotiations with their own boards -- might commission a similar report themselves.

Everyone's incentive is to make sure that every CEO, like the children of Lake Wobegon, gets paid ``above average.'' The result is ever-rising pay packages that are set by ``the market'' in the same way California wholesale electricity prices today are set by ``the market'' -- that is, by a small cartel of coordinated sellers who have the buyers (in this case, the shareholders) over a barrel.

The clearest proof that something in this ``market'' is amiss comes when failed CEOs are ousted with obscene departure packages -- in many cases going millions beyond what the chief negotiated on his or her way in.

Jill Barad, for example, received a $57 million severance package after nearly destroying toy-maker Mattel. Mark Willes walked away from a shabby stint at media giant Times-Mirror with a reported $90 million. Executives know that once they crack the inner sanctum, even failure is richly rewarded. Frontline employees who feel outraged and demoralized by such payoffs can't be blamed for thinking they represent hush money at work, not the free market.

Even insiders are getting squeamish at the excess. ``The risk is being taken out of executive compensation,'' laments one boardroom adviser. Another one says, ``It's all done in a very genteel manner. People at this level are treated very differently.''

Next time Congress takes up the debate about whether to raise the minimum wage, don't let the hypocrites fool you. After all, if the boss wouldn't think about having his paycheck determined entirely by the free market, why should anyone else?

© 2001 The Mercury News

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