Executive pay comes up every year as topic of conversation as we marvel at how the top .1% lives. One of the obvious points is that there is a disconnect between performance and compensation. I'm sure this has gone on since the dawn of time, but as numbers get bigger it gets a little more obvious.
My initial reaction was that free markets ought to fix this problem. And then I realized that I'm making the same mistake so many people make in analyzing evolutionary systems: they assume that the process tends towards some sort of improvement. In fact, it does no such thing - or to the extent that it does, the improvement is very much in the eye of the beholder. In the case of CEO pay, parasitology has something to teach us.
Parasites can influence the behavior of host organisms in ways that make them less fit. The parasites, on the other hand do just fine. Scientists have looked for evidence of relative fitness that parasites may confer on their hosts and they have come up dry. In fact, parasites can destroy fitness up to and including killing their host.
Corporations in their modern form have existed for a little over a century, a time during which regulations on corporate governance have been eased fairly consistently. Corporations can act anywhere, but their charters are regulated by states. (If you want to understand the concern over the 'race to the bottom' in allowing health insurers to operate in multiple states, the world of corporate charters and regulation is an outstanding cautionary tale.) The reason that Standard Oil was Standard Oil of New Jersey was not because of petroleum reserves in the Pine Barrens, but because New Jersey was the most open to allowing trusts. Other innovations in corporate regulation have included staggered terms so that an entire board is not up for replacement at anyone time and a host of other rules which give management significant advantages in dealing with unruly shareholders. These tend to parallel the tools management uses to forestall unionization.
So the management of the company and the owners of the company have competing goals and the management wins. In his book, The Extended Phenotype, Dawkins talks about arms races and posits that the 13- and 17-year locust cycles may have come about to escape a now extinct parasite. So if there's an arms race, how come the shareholders are losing? The real issue is that for most shareholders, the impact isn't large enough to get excited enough to do anything about it. If you're pissed, sell the stock. For the CEO and his/her cronies, it's big bucks.
The solution? Two choices, beef up the laws to encourage shareholder democracy or class action suits. I know which one I'd pick.
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