One more time, is CEO pay justified?:

Banker Bonus Rain, by Nancy Folbre, Economix: ...Wall Street firms have always been famous for their generous bonuses to managers and traders — their so-called “rainmakers.” The graph ... shows that employee bonuses have actually exceeded the estimated pre-tax profits of United States securities dealers in many years. What is especially striking is the high level of these bonuses in 2007 and 2008, years in which profits were negative. ...

Much of the justification offered for current pay caps in the United States rests on indignation about government bailouts. As long as companies are not subsidized by taxpayer money, perhaps market forces should be allowed to determine pay.

But do market forces determine pay the way most economists assume? Many arguments to the contrary are effectively mobilized by the University of Massachusetts economist James Crotty in a recent working paper.

Top executives of financial firms often choose the very board members who are expected to monitor their pay decisions.

Investment banking is a demanding job. “Rainmakers” typically work long hours under high stress. Yet the number of highly qualified graduates from top colleges eager to enter investment banking has typically far exceeded the demand. Why hasn’t the excess of supply over demand failed to drive earnings down?

The importance of personal networks and contacts gives rainmakers leverage. As the Nobel laureate Oliver Williamson emphasizes, the threat of withdrawing from or disrupting productive relationships can give employees considerable power. The apprenticeship structure of the job gives senior managers and traders control over their successors.

The very qualities that contribute to success on the trading floor — including aggressive use of technical expertise — may be deployed in joint efforts to reduce competition from new job entrants...

In any case, highly paid employees in finance earn large premiums compared to their counterparts in other industries — pay differences that persist even when virtually all measurable differences in individual characteristics are taken into account. ...

Deregulation made it easier for rainmakers to conceal risks that short-term profits would morph into long-run losses. The oligopolistic structure of the industry — now more concentrated than ever as a result of bank failures and mergers — made it easier for them to collude.

Financial firms are investing heavily in lobbying to block efforts to make the industry more competitive. Their rainmakers are still pretty good at making rain for one another.

The article doesn't directly answer the question "is CEO pay justified?," but I will. No it isn't, and the way the pay is structured has led to bad incentives within these firms that contributed to our current problems (too much emphasis on short-term profits at the expense of what is best for stockholders in the long-run). There are still a few apologists -- those who argue that CEO pay is justified by their high productivity, i.e. by what they add to the firm, but their numbers are dwindling.

[Traveling: Preset to post automatically.]