Money, at its base, is slices of people's lives. Even if money grew on trees, there would still be value added by the time spent in the act of picking it. Barter, the basis of trade before money was invented, required a more-or-less immediate exchange of value - I give you these melons now, you give me those sandals now - and made complicated exchanges difficult. If all you have is melons and all you need is a shoelace, just how many slices of melon equate to one shoelace? Money allowed for time-deferred exchanges - you give me money for my melons now, I give you money for some sandals next month - and for exchanges that recognized that the same amount of work by one person, whether because of skill or scarcity of materials, could produce an end-product that was more valuable. Even though money represents hours of people's time, not all hours are created equal.
There are a lot of things that factor into how different hours are valued. Work that anyone can do and that nobody minds very much isn't valued highly, because there's a lot of competition to do that work. On the other hand, even some highly-skilled work, work with few competitors, can be given a low value if nobody wants the work output. There's a reason all of those buggy-whip makers went out of business with the arrival of the automobile, and it has nothing to do with their skill. And still, there is work that must be done, that few people want to do, and still isn't valued as highly as the lack of competition would make it seem. For example, the average septic tank cleaner takes home roughly the American average salary - not exactly a big premium for mucking out human wastes. One of the hidden impacts on how we value work product, something that probably isn't featured in a lot of economics texts, is the prestige of the work. We'll pay a lot more than someone would otherwise appear to work if we're someone convinced that person is special.
By that criterion, every ordinary CEO in the US must have disappeared over the last thirty years, because CEO pay has gone up from 35 times the average worker's pay, to about 350 times(!). In other words, in 1978 firing the CEO would save 35 regular workers' jobs; in 2008, 350. Just bringing the gap to 1978 levels could save 315 employees' jobs. Just what are all of the CEOs doing to justify a ten-times pay raise over the last thirty years? Keep especially in mind that the average worker's salary has stayed basically flat over this period.
Well, based on recent history, it seems that what CEOs do best is destroy their companies and lose money. If that's the case, I'm having trouble seeing the value in that work - I'd be willing to do it for the 1978 pay level and I know people who would lose money for free, my ex-wife being one of them. Obviously, today's companies are not each an individual somehow ten times more valuable or ten times more profitable than they were 30 years ago, so something else must have changed.
One of the big changes is the prestige factor. A lot of CEOs think that they're superstars, and since their boards of directors are composed largely of other CEOs, CEO-wannabes and CEO fans, the boards go along with that. Now, largely this is a delusion. There are some CEOs who have built major businesses from nothing - Bill Gates, for example, or Brin, Page and Schmidt, but by and large CEOs are a bunch of gladhanders who are much more full of themselves than reality supports. Certainly, the CEOs of Lehman Brothers, Goldman Sachs, Merrill Lynch, et al. don't deserve what they've been paid and really ought to give it back.
A lot of folks have been talking about this for a long time - CEO pay discussions were on the radar during the dotcom boom, for example, and probably before that. To date, relatively little has been done about it, and probably little will be done about it as long as corporations can keep it that way. It will take government intervention to make any real change, and business will cry and complain about the "heavy hand" of regulation if the government takes away their toys.
What to do, then? There's really little that can be done by anyone by government, so perhaps best to brainstorm solutions that use a lighter touch. For example, someone who is a great innovator, who invents something substantial and makes a huge profit off of it, it probably isn't that unreasonable for them to take home a big wad. On the other hand, if someone comes into an established business, strips it, pumps and dumps the stock and walks off with money that really belonged to the business, that person should be penalized. Were I created a solution to this problem, I'd be looking at what I could do with the tax code to strongly incent corporations to spread executive pay over a number of years - high taxes on immediate compensation, but a sliding scale for putting this year's pay off until 3 to 5 years down the road, for example. This way, someone who does a good job, making the company healthier for the long term, can still see value from the work, but someone who destroys the company to rip an immediate profit from it, won't.