In 2008, the CEOs of major US firms were paid more than 300 times the wage of the average American worker. Last year, they were paid just under 300 times average pay, according to new research by Mr. Pizzigati. Now that most of those firms have paid back the government, they're setting their own compensation levels again.This argument is riddled with flaws. First, no economic model could possibly imply that CEO pay is set by looking at the ratio of their wages to those of their employees. LeBron James is paid significantly more than his towel boy, so what? They perform completely different tasks, requiring completely different skills, in completely different environments. The question is not "are CEO's 300 times better that their employees at stocking shelves?" Rather, the question is "is the market for CEOs competitive?". The article itself suggests that there are plenty of qualified CEOs to choose from when starting a company.
Those levels would astonish the bosses of top corporations in the late 1960s. Those CEOs got about 30 times the average wage of US workers.
Are today's bosses 10 times more capable? Is there a shortage of able managers? Nope and nope, says Pizzigati. "There is more management talent today than ever before."
Quarterly Journal of Economics article "Why has CEO pay increased so much?", by Xavier Gabaix and Augustin Landier model CEO pay. They match the best CEOs with the largest firms, and note that even when CEO talent is not very disparate across CEOs, small differences in talent can lead to very large difference in pay because of firm size. For example, the top CEO (in terms of talent) can increase the value of his company by only 0.016% relative to the 250th talented CEO, but this translates to paying the top CEO 500% more than the 250th CEO because of firm size. In particular, the authors find that
The six-fold increase in CEO pay between 1980 and 2003 can be attributed to the six-fold increase in market capitalization of large U.S. companies during that period. When stock market valuations increase by 500%, under constant returns to scale, CEO “productivity” increases by 500%, and equilibrium CEO pay increases by 500%.In this light, high CEO pay makes sense. When a company's value increases greatly, the decisions of a CEO require him to handle more and more money. While the value of the company increases, his productivity increases. Meanwhile, individual workers on the factory floor do not handle more and more responsibility or produce more output as the firm grows, and should not be paid as though they do.