Reich then goes on to explain the increase in CEO pay over time as a rational consequence of increasing competition. In other words, 50 years ago, most large firms were in oligopolistic industries, with stable unions and predictable revenue streams. So, CEOs were almost like quasi-bureaucrats.
In contrast, now the level of competition is so fierce (and entry barriers so low) that even small differences in managerial quality can result in huge changes in profitability and market value. So, having a slightly better CEO can result in big gains to shareholder wealth. Not surprisingly, shareholders (or actually, boards of directors acting on the behalf of shareholders) realize this, and end up bidding up the price of good CEOs:
So how does the modern corporation attract and keep consumers and investors (who also have better and better comparative information)? How does it distinguish itself? More and more, that depends on its CEO -- who has to be sufficiently clever, ruthless and driven to find and pull the levers that will deliver competitive advantage.RTWT here
There are no standard textbook moves, no well-established strategies to draw upon. If there were, rivals would already be using them. The pool of proven talent is small because so few executives have been tested and succeeded. And the boards of major companies do not want to risk error. The cost of recruiting the wrong person can be very large -- and readily apparent in the deteriorating value of a company's shares. Boards are willing to pay more and more for CEOs and other top executives because their rivals are paying more and more for them. Former Home Depot CEO Robert Nardelli to the contrary notwithstanding, the pay is usually worth it to investors.
All in all, it's a great piece. But alas, after such great writing, Reich can't help himself, and finally reverts to type:
This economic explanation for sky-high CEO pay does not justify it socially or morally. It only means that investors think CEOs are worth it. As citizens, though, most of us disapprove. About 80% of Americans polled by the Los Angeles Times and Bloomberg in early 2006 said CEOs are overpaid. The reaction was roughly the same regardless of the respondent's income or political affiliation. But if America wants to rein in executive pay, the answer isn't more shareholder rights. Just as with the compensation of Hollywood celebrities or private-equity and hedge fund managers, the answer -- for anyone truly concerned -- is a higher marginal tax rate on the super pay of those in super demand. (emphasis mine)Ah well. Other than that line, it's still a great piece, and well worth reading.