CEO Pay in Protective Bubble

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK (TheStreet) -- A CEO makes more in a day than a worker makes in a year. In 2010, the average private sector worker received a 0.5% raise; the average large-company CEO had a 28.5% raise. The average annual compensation tallies in 2010 were $11.4 million vs. $33,800.

CEO-to-worker compensation has risen from 40:1 in 1980 to 337:1. When is this bubble going to burst?

That's wishful thinking. CEO compensation is now performance based and CEOs in 2010 presided over some healthy stock appreciation. They are ostensibly being rewarded for meeting their charter of maximizing shareholder value.

We really have to put aside the fact that 90% of S&P 500 companies gave CEOs stocks or options within a year of Lehman Brothers' collapse. This appears to make the relationship between a CEO's performance and increasing share values for these newer allocations very tenuous.

It is no accident that CEO compensation has become performance based -- even if there seem to be a few loopholes. In 1993, CEOs could no longer be paid millions for showing up. Executive compensation over $1 million had to be performance based in order to be tax deductible. Since 1994 S&P 500 CEO compensation has been roughly 75% performance based: 50% equity, and 25% for bonuses. Better yet, in 2010, the performance component was 88%: 63% equity and 25% bonus.

An analysis by Earl Meyer and Partners executive compensation consultants noted that in 2010 "total compensation went up around 20% and total shareholder return went up 16%. So that seems to be roughly right."

Roughly right for some and very wrong for others. A review of 2010 data on 200 companies with revenues of $7 billion-plus, prepared by the New York Times, shows CEO pay increases at 39 companies were 200% or more of stock returns. In 24 cases, pay increases exceeded 500%. Eighteen companies ran in the red but CEOs took home big performance bonuses.

What were these tax-deductible performance bonuses for, if not profitability? It appears that the IRS rule defining performance-based compensation allows a truck to be driven through it, and that's exactly what the companies affected by this ruling have done. Let's just say that what is performance based is up to the board's discretion. We'll assume that they also know that they are committed to maximizing shareholder value.