For those of us who have worked in the private sphere, the way compensation generally works is that companies look at the national average for positions and - taking into account cost of living adjustments - set their base compensation for employees in various brackets accordingly.  So if you're a computer programmer for an in-house database, your compensation is roughly in line with the national average for database programmers.  If you're an HR manager, your compensation is roughly in line with the national average for HR managers.

Here's where it gets good.  If you're a CEO, your compensation is based on, no surprise, the national average of other CEO's compensation packages.  But you sit on the Board of a few other companies.  And when their CEOs come up for salary negotiations, or when a new CEO is hired, you have a strong incentive to "pad" his salary - to make sure that he's making substantially more than the previous CEO was making.  Not because this is what's best for the shareholders or the company as a whole, but because it's what's best for YOUR personal compensation.  Because when it comes time for you to re-negotiate your compensation or for you to move to another company, you can point to a higher "national average" for Fortune 500 CEOs.  And since it's a limited pool, every dollar extra helps.  Not every CEO will do this, of course, but you can probably count the CEOs who think of the health of a company over the health of their own pocketbook on one hand.

It's a nice racket.  And in a sane world, one that the shareholders would put a stop to toot sweet.  But they never do.  Not even the institutional shareholders, who are normally hawks on stuff like this.  My suspicion, from working for one of those "institutional shareholders" for a few years is that they don't make waves because THEIR top people have their compensations determined by the same kind of national averages.  And the folks on institutional boards are often not the best informed on financial issues (they're often teachers, government employees, and other folks who are supposed to be there to generally supervise for wasted money, and as long as everything is working the way it works for other institutional investors, no one makes the connection.  Or if they do, no one is able to rock the boat enough to get it to change.)