CEO

Back in the 1970's and before CEO's earned about 25 times what the average employee earned but today they earn 400 times. What happened to distort the free market system. Companies used to pay their CEO's based on the compensation of other employees within the firm and this was called internal equity. Starting in the 1970's companies begin to hire outside consultants to determine CEO salaries. These consultant convinced the companies to use the average salaries of other CEO's in similar industries and this was called external equity. The consultant would be paid a fee and that can be tied to the compensation. Next the consultants instead of using the average salaries, they suggested that if the company wanted the best CEO he should be paid more than average. This led to many salaries being based on the top 20% of salaries as opposed to the average. In additions many board members belong to boards of other companies in something called interlocking directorates. These salaries were no longer based on past performance as demanded by the free market but based on some math gimmick that was sold to the board.