One of the largest and most respected industrial Chairmen and CEOs says:

“I don’t think consultants should be involved. I don’t think they necessarily add value for anything other than just pure data.”

There's no good correlation between shareholder return and CEO pay, in fact, many highly paid CEOs and corporate leaders have been sentenced to prison. If there is a "race to the bottom" for industrial jobs, it is clear that in the area of executive pay, there has been a race to the top.

The pay race statistics for the top should be familiar to everyone from the astronomical CEO to worker pay ratios that have floated into the 400 to 1 region to the widening gap between the very, very top of the pay scale and everyone else.

However it is not merely "Republican" policies that lead to this, according to EPI pay exploded from 1996 on. From a long slow grind upwards, was slashed by the stock market crash - never have so many been paid so well to lose so much money - and it has almost recovered to its pre-crash peak.

Gabier and Landier have hypothesized that market capitalization drives CEO pay. Given that a great deal of CEO pay is in the form of options - including back dated options - it seems like an argument that is plausible. Since we have had asset inflation - that is it takes more dollars to buy one dollar of future earnings now than it did 20 years ago - this logically implies that CEO pay will also be inflated.

But Immelt's comment shows that this is not the kind of gap that he is worried about:

“The key relationship is the one between the CEO and the top 25 managers in the company because that is the key team. Should the CEO make five times, three times or twice what this group make? That is debatable, but 20 times is lunacy, “ he said

In otherwords, not the gap between CEO and worker, but the gap between CEO and the people who are just underneath him - the "core management team" of the company. Realize that the people one step below CEO are well compensated, but not anywhere near as well compensated. Nor anywhere near as visible. The difference between number one and number two is as large, in some cases, as the difference between number two and the average worker.

The argument of 1981 was that taxing people at the top less would lead them to be more productive, and work harder. It hasn't happened for the economy at large. Productivity growth has not mirrored the growth in CEO pay, or the growth in market capitalization. Everyone isn't better off, instead cutting taxes on the very top has meant that there is more incentive to game the system and take large, often illegal, risks to get it. The chance for getting caught is so low, and the pay out is far larger than most people can imagine - more money in a year than an entire block filled with suburban professionals will make in a decade.

The pure populist would argue against this on its face: namely there is no reason why one person should be paid so much more than others. However, there is a reason, and that is that corporations are having more and more people under them, directly and indirectly. CEOs, paid as a total of the reach of the corporation, are being paid much more, but not as much more as the raw numbers might suggest.

But the rapid rocket rise of CEO pay suggests that we are seeing a kind of Google and Yahoo effect - that CEOs are being paid now for the global reach that corporate boards hope will happen. As globalization has ramped up, so have hopes that the first movers in the global industrial space will have the same kind of first mover advantage that players in national industrial spaces had.

But are these factors - rising capitalization, rising reach, hoped for first mover advantage - really inherent in just the CEO? If this were a case of boards compensating visionary CEOs extremely well, then Immelt is correct - the entire core management team should be sharing in the compensation. They are not. More over, again as Immelt implies, without a core management team, there is no way for the company to execute. Brilliant and daring plans often require brilliant and daring subordinates to have them happen.

I've done business with GE before, and may well again in the future. Several of my family members are former GE employees - I've seen the company turn in various directions with different eras. GE's core competence has not been as a "manufacturer", but as a company that could leverage technologies to improve a wide range of products - a systematic, rather than narrow, view of how industry should work - and in the area of finance. GE knows how to lend money, and as importantly, how to collect money.

There have been statements from the business press that GE is underpaying its talent, that people are being hired away from GE because of corporate culture under Immelt that does not pay people enough. However, that would imply that the people who are left are somehow less capable or less talented. This isn't the case. Instead it seems there is an evolution going on in GE where a kind of dedication remains - someone who buys into the vision that being a GE executive gives one more chances to accomplish - while people who are interested in other goals go elsewhere. One sees the same thing in that favorite corporate metaphor: sports. Some players want to play for championship teams, and other players want the highest pay, often going to very bad teams need a star very badly.

Whether Immelt's view of corporate compensation works at GE is going to be determined by events, however, his view that friction within corporate management, and disconnect between the board, which represents the shareholders, and scale of executive compensation - has merit, if for no other reason than the well known "agent" problem in economics. How do you know that the person you hire to manage your money will manage it for your benefit, rather than for his own?

To close the loop here - with increased corporate reach and globalization, comes an increased need for teams that work. The heads of many corporate divisions have as much budget, revenue and head count to manage as many large corporations did in 1950. The problems of coordination have not gotten smaller, and the number of balls on the billiards table have gotten larger. More over, the greater the difference between number one and his close team, the more likely it is that the struggle for succession will mean that team members who are not promoted will leave rapidly, causing a disintegration of the very team that the newly promoted CEO was hired to keep in place.

Incentives matter, and when even the people at the top of the industrial system are questioning whether the current incentive system works, it is time to look at the way it has come about. One key point is corporate democracy. The view among many in management is that the more, almost unlimited, power that management has, the better it will be. The argument runs this way: success comes from running risks. Risks take time to pan out. Too much corporate democracy will mean that the plug will be pulled on promising corporate programs before they have had time to come to fruition.

But if that were the case, then executive pay would be structured accordingly - failed plans wouldn't lead to large golden parachutes. Instead, failure is often the ticket to a secure future, a book deal, and an easier life on the lecture circuit. More often than CEO culture would like to admit, the job of a CEO, like Bush on Iraq, is to stall for time and hope the facts on the ground turn your way.

Viewed this way the CEO is a marginal effect - he doesn't bring about the company's core value, but improves, or degrades, that value based on his or her efforts. Of course there are spectacular exceptions, CEOs who either change the company's business, or who managed to meltdown a company's prospects - but by and large CEOs should be measured against their peers.

As people who have followed this story know, often it is the Lake Woebegon effect, where CEOs are paid more than the average of their peers. In some cases it is out of fear that a CEO leaving is more expensive than overpaying him or her in the present - rent seeking behavior. Viewed this way, the chaos of management change is so destructive to shareholder value, that CEOs, in effect, can hold investors hostage.

A combination of not seeing employers as marginal effects, and the rent they hold for the knowledge of holding the company together goes a long way to explaining not only high CEO pay, but why failed CEOs are often paid so well. A CEOs rent value disintegrates as their ability to hold the management team in place disintegrates - at the same time, their continued tenure becomes a threat: what happens if there is no good senior executive talent left by the time the CEO can be forced out? Thus an incentive to buy out what rent remains, and pay for the destruction that a CEO blowing holes in the bottom of the boat can cause.

If this is the case, and I submit that in the most exceptional cases of CEO overpay it is, then the solution isn't corporate autocracy with the "auteur CEO" who has a grand vision, but more corporate democracy. If the CEO is destroying the inside of the corporate structure, this can be seen, or felt, by share holders, many of whom are also senior executives. With a more balanced ration of voting of stock, the rent seeking behavior of executives can be nipped earlier, and managed better. The more the board knows about what is going on, the less they will fear a CEO leaving. The more the board knows about what is going on, the sooner they will be able to see that a CEO is degrading human assets.

If this discussion of what happens at the top of the top of the economy seems far removed, realize that your retirement, directly or indirectly, is tied to how this system works. While people cheer for football teams, in reality, it is the ability of the corporate system to deliver that means something. To use the sports analogy one more time, it is important to get wins, not have individual players pad their statistics. Even points don't matter as much as victories.

Right now this system is delivering a great deal of profit, but its returns on invested capital are less than impressive. It is not delivering wages, benefits and improvements in general standard of living to core industrialized nations. Recently Larry Summers, former Treasury Secretary and Fromer President of Harvard - a man who has seen both success and failure at the top - stated that the great anxiety of the global middle is the challenge that a real leader must face in the present. The disconnect between the pay of those at the very top and everyone else, is part of this anxiety.

Facing it means facing that the theory of the auteur CEO is, in most cases, not justified by results - and that share holders are at least as good at estimating the virtues of a plan and its execution as executives at the top.