This argues CEOs are underpaid:
Why Do We Underpay Our Best CEOs?, by Dominic Basulto, American.com: Sure, some CEOs aren’t worth their outrageous compensation, but a bigger problem is that large public companies, in many cases, don’t pay enough. The best and brightest minds are increasingly drawn from running key businesses to other pursuits that may not be as socially useful—but pay much more. A recent Gallup poll found that only one in six Americans thinks highly of business executives. Is it any wonder? This past year ... there was the scandal over backdating stock-option grants and the revelations at Hewlett-Packard of prying into telephone records. Meanwhile, the average CEO of a large, publicly traded American company now has annual compensation of $10.5 million—or about 300 times higher than the average U.S. worker. “How do I feel about executive compensation?” said John Bogle, founder of Vanguard mutual funds. “Terrible.” CEO pay packages are “outrageous” and “inexcusable,” he added.
But are they really? In fact, there’s strong evidence that, far from being paid too much, many CEOs are paid too little. Not only do the top managers of multibillion-dollar corporations earn less than basketball players (LeBron James of the Cleveland Cavaliers makes $26 million), they are also outpaced in compensation by financial impresarios at hedge funds, private equity firms, and investment banks. Should we care? Yes. If other positions pay far more, then the best and the brightest minds will be drawn away from running major businesses to pursuits that may not be as socially useful—if not to the basketball court, then to money management.
Still, the legend of the overpaid CEO persists. A widely accepted explanation for excessive CEO pay goes like this: Contrary to the theory that a board of directors sets the boss’s pay in order to maximize profits for shareholders, powerful CEOs actually control boards. Directors owe their well-paying positions to the chief executive, so they give him a pay package far in excess of what it should be. The compensation committee of the board of directors effectively acts as a rubber stamp for the CEO...
Three law school professors—Lucian Bebchuk of Harvard, Jesse Fried of the University of California at Berkeley, and David Walker of Brown—laid out this argument in an influential academic paper titled “Managerial Power and Rent Extraction in the Design of Executive Compensation.” It’s a simple story with obvious media appeal.
While the explanation is undoubtedly true in some cases, it is less than satisfactory as a general proposition, especially at a time when Sarbanes-Oxley legislation has closed the kind of managerial-power loopholes that might have been exploited by some CEOs, and has instead elevated the authority of directors. And, in an age when shareholders judge performance on a quarterly basis, the CEO who fails to produce results is often shown the door by directors rather than dominating them. ...
If Bebchuk and his colleagues are mistaken, then what is the theoretical model that offers a convincing market-based explanation for the hiring trends in the CEO marketplace? Two professors at the University of Southern California’s Marshall School of Business, Kevin J. Murphy and Jan Zabojnik, may have the answer. They start with the observation that big businesses in recent years have been hiring more outsiders—that is, CEOs who don’t work for the company that is bringing them on, or even in the same industry. In addition, the outsiders make more money than the insiders...
These two developments, according to Murphy and Zabojnik, reflect a fundamental change in the types of managerial skills required to run large companies. General managerial skills like finance, marketing, and strategy are increasingly more important than firm-specific skills, such as understanding the drug pipeline of a pharmaceutical company or knowing how to negotiate with a steel company’s suppliers, unions, and big customers...
In the past, a firm typically promoted from within, preferring to select someone with a proven track record within a certain industry. ... But that is changing. ... As markets grow increasingly globalized and information—thanks to the Internet—becomes more accessible, it’s not hard to see why boards of directors are going outside their companies and industries to find CEOs. But, if aviation and packaged-goods executives are added to the pool of CEO candidates for an auto company, doesn’t that increase supply and thus drive down price? Shouldn’t compensation fall rather than rise?
Not necessarily. The variety of candidates in the pool may increase, but not the number. In the past, companies were content to promote from within because they did not need someone with, for example, broad strategic and financial experience in the greater world. Now, they do, but such folks aren’t easy to find. In fact, it’s likely that the supply of top-notch CEOs for global companies is leveling off or even falling.
One reason for this is that the smartest potential CEOs are being siphoned off by higher-paid professions where public scrutiny and board control are less pronounced. After all, the same talent pool that produces doctors, lawyers, portfolio managers, and investment bankers also produces a fair share of CEOs. When it comes to compensation, the peer group for a CEO is not just the CEO next door, but also the venture capitalist on the other side of the country, or the investment banker on the other side of the world. ...
An able leader has an enormous impact on the success of a business. Certainly, some excessive corporate pay packages are “outrageous,” as Bogle and other critics claim. But even more outrageous is a system where Dr. Phil makes more than twice as much as Jeffrey Immelt, CEO of GE, the world’s most valuable company; where Jessica Simpson makes more than the average earned by the CEOs of America’s 500 largest corporations; and where hedge fund managers who make the right bet on the yen-dollar relationship can take home ten times as much as the head of the nation’s largest exporter.
Because of the growing complexity of the corporate leadership role and the paucity of CEOs with positive alpha, it’s almost certain that pay will rise—at least among companies that are not listed on stock exchanges and subject to the regulatory regime of Sarbanes-Oxley and media scrutiny of compensation. CEO pay at some of the largest and most important publicly traded companies, however, may remain constrained. That’s not a good thing—not for those businesses, their shareholders, or the economy as a whole.
If the compensation packages for CEOs, venture capitalists, hedge fund managers, etc. are market based, then what's the problem? Resources are supposed to flow where they are most valued. If venture capitalists, investment bankers, and others are paid more, it's a signal to encourage more resources to flow into those occupations. We wouldn't want to divert them artificially into becoming CEOs and misallocate valuable resources. To say the other occupations aren't as "socially useful" as CEOs doesn't make much sense if compensation is market-based since price signals value. Conversely, if the compensation packages aren't market based, but instead deviate from market fundamentals, then they aren't valid comparators.
Though the article appeals to a supply and demand, market-based story to argue supply restrictions have driven compensation levels higher, it seems to admit that CEO salaries are not set properly, i.e. are not consistent with market fundamentals (otherwise, what is there to complain about or change?). The claim is that the salaries are set too low in most cases as compared to other occupations (which are implicitly assumed to be market-based).
Since an average of a mere $10.5 million per year is far too low to get good people, how should CEO salaries be set? The most important fundamental to consider, it appears, is that CEOs be paid more than Dr. Phil, LeBron James, or Jessica Simpson. And certainly more than venture capitalists, hedge fund managers, investment bankers and the like, and most certainly more than those lowly doctors, lawyers, and portfolio managers. In fact, from the sound of it, supply and demand don't matter at all, the only just outcome is one where CEOs are paid more than anyone else.
Thus, I think it's time to seriously consider enacting a minimum wage for CEOs to draw more talented people into this occupation. As the article makes clear, the average quality CEO is much too low as it stands and this could help. Say, $25 million annually for openers?