Two Harvard professors are arguing that CEO pay is so high because it is not an efficient market. Are they right? I don't know enough about the process of determining pay for large companies, but their answer sounds plausible.
But in setting executive pay, as we document in our research, directors have not been guided solely by the interests of shareholders. Instead, they have had various economic incentives, reinforced by social and psychological factors, to go along with arrangements favorable to top managers. The nature of board membership, combined with the small size of the overall director community, results in a closed culture among people who share many relationships: those with whom board members are economically involved are the same as those with whom they are socially linked through shared status, organizational affiliations, and social standing.
In other words, boards take care of their buddies.