Megan's post on Tim Harford's new book and competing explanation for CEO Pay is interesting. I think she leaves out a couple of things, though:• Culture Matters: As Megan writes, the rapid rise in executive compensation "started in the 1980s but really got going in the 1990s, towards ever larger CEO paychecks." I think the fact that it began in the 80s provides a useful clue here. Check out this graph:
The election of Reagan heralded some tax changes and policy tweaks that helped rich folks make even more money, but it also heralded a shift in our economic culture: Reagan did much, both through example (firing the air traffic workers) and through appointment (stacking the NLRB), to break the back of the unions, and signal to corporations that the government would not look unkindly upon their attempts to union best. He did much to codify the virtue of economic individualism, and to trash concerns about equity and distribution. And so, timidly at first, those with the power to direct corporate profits took a bit more for themselves, then, over, time, a lot more. It turned out there really were no consequences -- unions were too weak to impose them, and government had no interest in using the tax code or any other redistributive tool to change the outcomes.• Signaling Matters. Imagine you're a Master of the Universe, running Office Max for $5 million a year. And your fellow Master of the Universe becomes CEO of Home Depot, for $15 million a year. And now Staples wants you to become their CEO. What's your asking price?
The election of Reagan heralded some tax changes and policy tweaks that helped rich folks make even more money, but it also heralded a shift in our economic culture: Reagan did much, both through example (firing the air traffic workers) and through appointment (stacking the NLRB), to break the back of the unions, and signal to corporations that the government would not look unkindly upon their attempts to union best. He did much to codify the virtue of economic individualism, and to trash concerns about equity and distribution. And so, timidly at first, those with the power to direct corporate profits took a bit more for themselves, then, over, time, a lot more. It turned out there really were no consequences -- unions were too weak to impose them, and government had no interest in using the tax code or any other redistributive tool to change the outcomes.• Signaling Matters. Imagine you're a Master of the Universe, running Office Max for $5 million a year. And your fellow Master of the Universe becomes CEO of Home Depot, for $15 million a year. And now Staples wants you to become their CEO. What's your asking price? 
