by Ross Gardner

Created on: March 03, 2009   Last Updated: March 10, 2009

I find it very interesting that there is even a debate on limiting the pay that businesses can pay their CEO. Especially when there seems to be very little discussion on whether to limit professional athletes pay, does it make sense to pay Alex Rodriguez $250 million for 10 years of playing baseball? What about limiting Movie Stars Pay? Does it make sense to pay Brad Pitt $20 million per each movie that he makes? No one seems to think that Brittney Spears pay should be limited even though she earns more than $750,000 each month. Does some CEO pay seem excessive? Sure, but there are many other professions in which pay seems to be excessive as well. However in this capitalistic economy, the laws of supply and demand are used to set the wages of all professions, from movie stars, musicians, professional athletes, and yes CEOs as well.

In this free market economy you need to think of pay like going to an auction, everyone is selling their skills on the open market to the highest bidder. In this way it does make sense that individuals that have most outstanding skills in their profession are paid the highest in their profession. How many people who were given multiple job offers would accept the lowest one? I would argue that very few would. Following this line of thinking, there already is a maximum limit that is set on CEOs pay. However, the thing that bothers most people is that the limit is not predefined, but is set by the highest bidder. You should also keep in mind that the highest bidder thinks that they can earn more money in their enterprise with the individual that they hired, than they are paying them. Would a movie producer hire Brad Pitt to star in a movie that they thought would gross more money without him, no they wouldn't waste the $20 million that could go directly into their wallets instead. However the highest bidder does need to be educated about the appropriate amount that they should pay for the services of the CEO that they want to hire.

Unfortunately, many corporate boards and, specifically corporate compensation committees have very little experience with determining what appropriate salary levels that should be paid to the chief executives that they are hiring. Many rely on guidance from the chief executives that they are hiring themselves. Corporate compensation committees should gather as much data as possible in order to make an educated decision. After all would a bidder at an auction not want to have a painting appraised before they

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