In the Money

That is a lot of money, to be sure — though not quite as much as it sometimes seems. The "average" pay that is often quoted, and which is used as the basis for comparison with the "average worker", is the arithmetic mean. The chart above, from a different study, shows the average earnings of the top three executives all the way back to the 1930s. Whereas mean pay at the peak was 320 times average earnings, the median pay was "only" 120 times. In 2000-03 their mean annual pay was $8.5m and the median $4.1m. The median is a better measure than the mean because the mean for those top three is skewed by a few huge payments, often to company founders or family managers who are not standard executives.

Although overpaying a chief executive on its own is unlikely to bankrupt a company, there are other reasons to care about top pay. One is incentives. The role of pay is not to get executives to work harder (most are workaholics already, toiling towards an appointment with the heart surgeon), but to recruit good managers and get them to take difficult decisions. Shutting a subsidiary, sacrificing a pet project or forgoing a tempting acquisition is not much fun. Without the spur of high pay, managers tend to avoid such things.

Pay is also outsiders' most visible test of a board's capacity to monitor a company's executives. Mr Bebchuk, a fierce critic of the developments of the past few years, declares that "pay is not isolated: it is a classic board function important beyond just dollars." If he is right that boards are unable to control pay, then poor governance is leaving managers free to use the company's assets for their own benefit. Excessive pay "undermines the notion that we can trust investment to managers and directors", says Nell Minow, head of the Corporate Library. It becomes the justification for wide-ranging governance reform.

Lastly, executive pay is the most controversial aspect of the increasing inequality that has appeared over the past couple of decades. As the topmost echelon appears to be capturing a huge share of new wealth, everyone else's wages have barely shifted. This would be disruptive even if managers were felt to deserve what they are paid. It would be explosive if high pay continued to be seen as a swindle. Ultimately, businesses function with the blessing of workers, shareholders, customers and voters. If business leaders are universally seen as immoral and grasping, cynicism and mistrust will flourish and choke enterprise. Jeb Bush, a Republican former governor of Florida and no enemy of business, gave warning last year that "if the rewards for CEOs and their teams become extraordinarily high with no link to performance, then it undermines people's confidence in capitalism."

Across the rich economies, governments have begun to demand disclosure of pay and new corporate-governance codes. In America's Congress Charles Grassley, a Republican and former head of the Senate committee on finance, is calling for boards to "do their job" instead of being "in hock" to managers. Barney Frank, the new Democratic head of the House financial-services committee, is likely to introduce a bill on pay.

All this makes business people extremely nervous. The difficulty is that they find it hard to discuss pay. (Imagine the talking point: "I am worth $100m because...") Their case is seldom heard or examined. But "it is a societal problem," says Jay Lorsch, of Harvard Business School. "If the business community doesn't do something, we are going to get more pressure from the federal government — and we don't want that."

The arguments about pay are subtle and complex. They start with that moment in the 1980s when the long-established relationship between workers' and managers' pay began to break down. What could explain such a turning point?

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