Why Do CEOs Make So Much Money?

BY busadmin  July 21, 2009 at 10:42 AM EST

$100 bill; via Flickr

Question: Why do CEOs make so much money? The answer must be supply and demand, but I would like to hear a good analysis of the cost benefit. I do realize too however: Would I really entrust billions of dollars to an employee being paid $100,000/yr? Or even several? Probably not. How much then? And then what can we expect of govt. employees managing that much or more?

Paul Solman: I have a perhaps idiosyncratic (or, in plain English, “quirky”) view of this matter. I think CEOs make so much money in part because of magical thinking, in part because of the power wielded by the executive class.

Corporations, and most particularly the pay of CEOs, is managed by Boards of Directors. Who is on the Boards? Many former executives. What opinion do they tend to have of their own worth? Like many of us, an inflated one. Moreover, it is in their interest, and the interest of those with whom they’re close, to pay THEIR CEO top dollar. Why? Because executive pay in general is ratcheted up thereby.

I adopted a motto at the outset of my reportorial career: There is no big time. It meant, and continues to mean, that much of what passes for mastery in the world of business (and politics) is pure illusion. I quote a book I co-authored back in the early ’80s: “[b]ehind the bottom line, there are many more crossed fingers than the traditional view of business would lead us to believe.” Or than the pay of CEOs could possibly justify.

For a more formal analysis of the randomness of corporate success, see Josef Steindl’s Random Processes and the Growth of Firms. For our reporting on this issue, see here, here, and here.