Certain politicians and social critics would have us scandalized that the annual income of CEOs of large corporations is often several times that of the employees who work in those companies. Is it unfair that executives make substantially more than a middle manager, an executive assistant, or an assembly-line worker? How are those salaries determined? Is significant income disparity unjust? To consider these questions, let’s take a look at the unique role and responsibilities of a chief executive officer.

Supply and Demand for Talent

You probably recall from Economics 101 that prices are determined by the interplay of supply and demand. Labor pricing, or compensation, is no exception.

Large corporations compete for experienced, proven, high-performing CEOs to run their companies. The directors of a corporation make the subjective determination of recruiting executives and setting their compensation. But that compensation package is often highly negotiated.

A friend of mine has claimed American CEOs are overpaid because CEOs in Japan are paid much less, and still do a good job.

He has yet to explain why corporations haven’t decided to save money by recruiting CEOs from Japan.