link here to article
Mark Thoma does a good job of trying to answer this question. Economic theory says that pay is a function of productivity. In that case, the Ford CEO would have earned the $54 million by his contribution to the productivity of Ford employees. Obviously, one cannot measure CEO productivity so we can't use economic theory to answer the question. We can, however, compare CEO's in the US with CEO's in other countries. American CEO's are paid several times what CEO's in Europe and Japan earn. It would be hard to argue that they are several times as productive as their CEO counterparts overseas. Some research suggests that there is a relationship between CEO pay and poor performance. Overpaid CEO's, in that case, reflects weak corporate governance which contributes to poor performance. Mark Thoma also suggests that linking CEO pay to financial results may influence CEO's to make decisions that maximize short term performance at the expense of longer term growth and profitability.
The best study that I have read on this subject is in a book called " Searching for a Corporate Savior". It was written by R. Khurana, a Harvard professor who did a study of the CEO selection process by corporate boards. He concluded that there is no market for corporate CEO's, in the sense that economists refer to markets, where the price is determined by supply and demand factors. CEO pay is determined by a process that is primarily devoted to justifying whatever the CEO and the board agree upon. It is an irrational process that is made to look rational.
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