The Frenchman is correct. I am old enough to remember before NAFTA and outsourcing to Mexico or China or Indonesia. When the CEO of the Fortune 500 companies were paid a salary with a year end bonus -- but those bonuses were not in the millions of dollars, they were within reason. Most lived in nice homes, not lavish or extravagant homes. Heck back then even Hollywood stars had what would be considered a shack today in Malibu for weekend vacations and nice, but not thousands of square feet homes in Bel Air or Beverly Hills... then along came Jack Welch and GE and outsourcing to China and telling other companies - you want to do business with GE you have to follow suit... starting under Reagan late in his second term, placed on steroids by GHWB and then Clinton... and then there came the Hedge Funds, they originated at a smaller degree in the 20's, amped up a bit in the late 40's, then went quiet in the big recession of the late 60's - earl;y 70's (thank you Richard Nixon /s) and then in the 90's went full tilt.... the started including credit arbitrage, distressed debt, fixed income, pension and endowment funds and more and more portfolios went into the Hedge Funds.......and... the Romney graduating class from Harvard was on the forefront of all of this... many people - like Romney became wildly rich while the middle class of this country has slowly, but surely, been eroding as a result of it....
So now we're going to start delving into the mythical fantasy world of price-gouging and wage-slavery, are we?
What's sorely lacking here is any real analysis of why this is the current state of affairs. First off, let's dismiss any fantasies of price-gouging; the US is, at least for the time being, still a free market economy and - other than health insurance - we generally aren't forced to buy too many products and - with some notable exceptions - the governments (federal or state) don't generally engage in rampant price-setting. It therefore necessarily follows that the revenues these companies earn - and it is, after all, from revenues whence floweth the compensation of CEOs - is a fair measure of the real market value of the goods or services these companies sell. In other words, these companies haven't been "stealing" or price-gouging, they've simply been selling goods and services at prices people are voluntarily willing to pay.
Therefore, these companies' revenues are for the most part legitimately earned.
Now let's move on to the mythical land of wage-slavery. Are these companies really abusing the people who choose to work for them, paying them subpar wages? So far as I know, people in the US are still free to come and go as they please and to work, or not work, for whomever will hire them, which means that if the employees at these companies are dissatisfied with their pay they are free to find better paying jobs. As such, the claim that these companies are abusing their employees by paying subpar wages is rather weak. But still, let's string the argument along a little and throw in that fave bogie man, economic necessity: the argument goes that people have to have some sort of work to pay their living expenses (true enough) and so these companies, knowing that, effectively indenture their employees to their service by paying them just enough to survive on, but not enough to do any better because the alternative is getting fired and having nothing.
Keeping in mind that this conveniently ignores minor details like unemployment compensation, it also flies in the face of reality because it implicitly assumes that there is a cabal or some sort of tacit agreement amongst most major companies in the US to keep their wages uniformly low and to avoid poaching other companies' employees. Now, if this is true, then someone needs to call the anti-business liberals at the FTC and in the trial lawyers' bar associations because that would be the biggest antitrust conspiracy ever, bar none; that so far not even the worst of the strike-suit law firms has sued any of these companies for antitrust violations based on wage collusion is a pretty good indicator that no such collusion exists. So much for low-wage conspiracy theories.
That leaves only non-intentional limitations on the ability of dissatisfied employees to find better-paying jobs, and most of those limitations have to do with the fact that the economy is still just limping along, barely getting by (the real economy, that is, not the false economy of the stock market), with the result that there isn't a lot of pressure from companies to hire employees away from other companies. Now I don't know about you, but I think it's even more far-fetched - and a potentially bigger antitrust case - to assume that these companies are somehow - in a non-collusive way - limiting the overall activity of the economy in order to reduce hiring pressures so they can keep their employees locked into their subpar wages.
Consequently, it follows that, even though a lot of people are not happy with what they're getting paid - we'd all love to be paid a million bucks a year - most people have done their own economic calculus and have concluded that, all things considered, the wages they're getting paid are acceptable given the current economic conditions (and each individual's basket of risk/reward preferences). As such, by and large these companies are not funding uneconomically lavish CEO compensation on the backs of employee wage-slaves.
Which brings us back to the original question, but with a lot of the underbrush and nonsense cleared away: why do these companies pay their CEOs so lavishly? Allied to that is this: who is getting less because these CEOs are getting more?
As to the second question, we've already discounted consumers and the rank-and-file employees; however, there is another (huge) class of stakeholders that never gets properly mentioned, although it is beyond me why they don't. That would be the owners of these companies, the shareholders. That's right, the shareholders. Under very, very basic economic theory, the shareholders, as the owners of a company, are entitled to receive all of that company's net profits after all expenses - including CEO compensation - has been paid. Therefore, for any given year there is a zero-sum game for the net profits a company earns for that year: the more of those profits that go to pay the CEO, the less there is for the shareholders to divide amongst themselves.
In other words, the people who are, if you will, "suffering" economically because of lavish CEO pay are the shareholders, who get a smaller cut of the company's net operating profits because of it.
But, but, but, ... you say: the shareholders are the bosses of the company so if they were really getting hurt they could stop it from happening by simply electing directors who would cut the CEO's pay; since they clearly haven't it must be that they aren't being hurt by it.
Now you're getting the hang of it. You look to existing economic relationships and try to figure out why they are the way they are, particularly those that don't seem to make sense on the surface, because - as with my discussion of employees above - people generally won't continue an economic transaction/relationship unless they feel they're getting some net benefit out of it (and, more to the point, that the net benefit they do get is greater than the benefit they could get from any other available economic transaction/relationship).
So, why is it that the shareholders of all these companies are willing to sit still for this too-lavish CEO pay when the money for it is coming out of their pockets?
Simple: because shareholders by and large do not actually want to get their share of a company's net operating profits - at least not paid out to them in cash at the end of each fiscal year once those net operating profits have been determined. What? How can that be? Simple: the only way that the net operating profits of a company get out to its shareholders is if the company declares a dividend, and dividends are the only species of income that is subject to a double tax, being taxed once when earned by the company and second when distributed to the shareholders.
No, shareholders by and large do not want dividends; instead, they want to reap the benefits of their investment through the appreciation in the value of their stock, which they can then reap as capital gains on their own time frame and which will be subject to a lower rate of tax than dividends (keep in mind, the concept of taxing so-called "qualified dividends" at capital gains rates is very new - it came in in 2003 - and that even so, the funds used to pay qualified dividends are still subject to the corporate income tax, meaning that the double tax problem has only been reduced, not done away with).
So, what does that leave us with? It leaves us with a situation where a profitable company has a pile of cash at the end of the year - that is, before final CEO bonus compensation is paid - that (a) the owners of the company, the shareholders, don't really want, and (b) that cannot really be profitably reinvested in the company's own business because the company has already plowed back into its business as much as it can economically reinvest. The company also cannot just put the money into US Treasuries or some other passive investment and just let it sit there because there's another tax, the accumulated earnings and profits tax, that kicks in whenever a corporation holds on to too much idle cash.
So, what to do with this cash? Well, it can't stay in the company's hands because it'll just go to Uncle Sam in the form of an accumulated profits tax and there aren't any more plausible reinvestments the company could make with that cash that would avoid this tax. The company could push it out to the shareholders by declaring a dividend, but the shareholders aren't too enthusiastic about that because (a) it'll dampen the market price of their shares (shares ex-dividend are worth less than shares pre-dividend) and (b) it'll increase their taxes and, again, Uncle Sam will get a large part of it. The company could sprinkle it all over the entire staff, but (a) that wouldn't do much if each employee got an equal share (e.g., in 2012 JC Penny paid its CEO $53.3M - assuming that was all cash comp, which it wasn't - if that amount had instead been divvied out in equal parts to all 159,000 of JC Penny's employees, each would have received about $335; if the CEO had been allowed to keep $20M of that compensation, then each employee would have received about $200), and it would be completely unnoticeable if that money had gone toward increasing wages during the course of the year instead of going out as a year-end bonus, and (b) giving every employee a little (additional) Christmas bonus isn't going to raise the stock price, even though it does somewhat reduce the overall amount that Uncle Sam gets since the money paid as comp isn't subject to the corporate income tax.
Finally, the company could instead spend the money to hire a splashy rock-star CEO (and other top echelon management types) who will wow the markets and help to lift the stock price to new heights. Now that at least gives the shareholders something they want - an increase in the value of their investment without an immediate tax hit, and an increase that will be subject to only one level of tax, at the individual level not the corporate level, and even better at the low capital gains tax rate - and reduces the overall amount that Uncle Sam gets since money paid as compensation is not subject to the corporate income tax.
Mind you, this isn't a perfect system, it doesn't always work out that way, but at least at the time that it's proposed, it usually gets support because, in part, most investors are optimists and even if the rock-star CEO hired by someone else's company didn't rocket the share price to the stratosphere, the rock-star CEO hired by my company will.
Management, of course, is not about to look this gift horse too closely in the mouth, and shareholders are generally not that adverse to it because they have seen it happen in the past where a moribund company hired a turn-around artist who actually turned the company around and made its shareholders rich.
I hope you've been paying attention through this ordeal and have picked up on the salient, key issue buried in all this verbiage:
taxes. What drives the lavish CEO pay you're complaining about is, by and large, the tax system and the way that it has distorted the investment market to disfavor dividends and to favor pie-in-the-sky hopes for future capital gains. The result is made even worse by other aspects of the tax system I haven't even touched upon, such as the fact that a lot of the lavish CEO compensation is in the form of stock options that are not taxed as highly as is cash compensation.
Taxes - in particular the distortionary effects of our present tax code - and the wishful thinking of many shareholders/investors - is the principal driver behind these too-lavish rates of CEO compensation. Price-gouging and wage-slavery are simply tepid little mythological illusions by comparison; and yet, that is what people tend to fixate on.