Here's the Best Argument Against High CEO Pay

I've been reading John Kenneth Galbraith lately, the late great and now terribly unfashionable Canadian-American economist. No one seems to take his economics seriously anymore but he was a strong writer and he had a lot of interesting things to say on a lot of still relevant topics. CEO pay, for instance.

In The Affluent Society, Galbraith makes the best argument I've read against sky-high CEO compensation (he was writing in 1958 when compensation was sky-high rather than stratospheric). He notes that the modern corporation, when it is out of its entrepreneurial stage (usually the founder stage), is organized primarily to reduce risk. It has established its product and its market. It is now concerned with the security of its profits so it seeks to eliminate or avoid competition in order to maintain its prices. It buys up smaller competitors, enters into informal price and production agreements, seeks protections through tariffs or quotas or limits to foreign competition or other regulatory means. It advertises in order to protect its client base. It dabbles in new technologies not so much in search of innovation as to identify potential threats. It plays nice with the rest of the corporate community and with government. It's all about maintaining stasis and managing downside risk.

That makes sense. You would probably do the same things if you were chairman of the board of a mature public company.

You would also take care to ensure that you are not overly dependent on any one person. That's part of managing your risk. You want the organization to supersede any individual manager in your employ. You have a management team so that no single person can be powerful enough to do any real damage to the corporation by departing or misbehaving. Members of your team will come and go and the stock price will not move in response to any adjustments to its membership. If you are executing properly, you can put a donkey in the CEO's chair and still meet your targets.

In sum, the modern corporate CEO is not the dashing entrepreneurial figure of lore. All of the major perils of his business, the risks of true entrepreneurship, have been eliminated. He (or she) is fettered and blinkered and far from chafing against these restraints he is careful in his every move, in keeping with his training. He is gloriously compensated merely to maintain the fiction of a long-dead corporate dynamism. It wouldn't do to let the competition, the government, suppliers and staff to know the reality of the situation.