Though the level of CEO pay compared to average employees is understandable, it is outrageous. CEO pay skyrocketed when companies bought into the academic idea that only shareholders interests mattter. Thus, if executives were incented to reward only shareholders by driving up earnings, and therefore, share price, they would do the right things. Omitted from this overly narrow viewpoint was the relative ease of manipulating earnings, a great temptation to the executives who received shares or options, which are priced at a multiple of earnings. Added to that was the sudden wealth of very young entrepreneurs in the dotcom boom, which irritated executives who had worked their way up the compensation chain much more slowly. Finally, the widespread practice of using consultants on compensation, who determine what average compensation is in that industry, creates a Lake Woebegone effect: few companies want to just pay their CEO the average, so there is a built in escalator.
The reasons for pay getting so high are understandable, but the consequences are terrible. When CEOs are paid 100 times what the lowest paid employees are, cynicism and decreased commitment result, making it harder to get full investment from employees. Efforts to cut costs, sometimes neceesary, are met with counter efforts to protect jobs and benefits, with little regard for external realities. Efforts to induce innovation and new ideas are far less successful than necessary, because employees at all levels focius on “what is in it for me,” not what is needed for the company to prosper. And at the top, decisions become more and more short term, to meet Wall St. expectations and protect or elevate stock price, so that payoffs will be high. How else can the CEO walk away with 10s of millions, even though the company may be less well off for the future, or in (all too frequent) extreme cases, where the company is hit with the consequences of the manipulations to earnings, whether they were illegal or uninformed. The subprime mortgage crisis may have been a product of unintentional ignorance of the consewquences and risks of the financial techniques utilized, but the temptations to get in on the earnings/stock price gravy train were potent.
One doesn’t have to be against high salaries and other compensation, when earned by organization buuilders who balance long term benefits with short term gains, to see the disastrous consequences of what has happened to pay at the top. Among these consequences is that students are attracted to MBA programs thinking of how fast they can score big money, rather than of how well they canbuild organizations that create great products, develop challenging and interesting jobs for others, help the communities in which the organizations are located, and aid the environment. Professionals are supposed to think more braodly than personal monetary gain; when top managers do not, we all lose.