[kvcc01]

In the typical case, CEO pay is determined by the compensation committee of the board of directors. The comp committee, in turn, hires a compensation consultant, who presents the board a study of how much other CEOs of similarly sized companies in the same industry get paid. Since no board wants their CEO to be paid "below average", they'll generally vote for a raise to bring it at least to the prevailing average. But since all boards are behaving similarly, the prevailing average ratchets up in each cycle.

This ratcheting theory is straight from Warren Buffett's annual letters, and it's a good illustration of the results of perverse incentives, considering that board members are often nominated by the CEO so there's peer pressure to "play nice" and not to antagonize the CEO.

[mzzk]

It's not strictly the board's fault. The CEO market demands high salaries. Few worthwhile CEOs will accept a position at less than market value.

[contravert]

I always found the free market argument hard to believe.

Why is it you can hire a world-class nuclear physicist or neurosurgeon for less than a percent of what a CEO is paid?