Politicians are in a tizzy over how much corporate leaders make--about $8 million this year for CEOs of S&P 500 companies, according to the Financial Times. Rep. Barney Frank, D-Mass., has even introduced a bill titled "The Protection Against Executive Compensation Abuse Act.

Resident Fellow James K. Glassman

"Yes, CEO pay--including the record bonuses paid this year to heads of Wall Street firms such as Morgan Stanley and Goldman Sachs--is attention-grabbing and has increased sixfold over the past 25 years. But, as economists Xavier Gabaix of MIT and Augustin Landier of NYU concluded in a study in July, that increase "can be fully attributed to the sixfold increase in market capitalization of large U.S. companies during that period." CEOs get paid more because they run bigger, more valuable companies.

Critics, notably Lucian Bebchuk of Harvard, argue that corporate boards are held captive by CEOs, who essentially dictate their own pay. Actually, though, rising pay has coincided with a trend toward more powerful and independent boards.

Kevin J. Murphy and Jan Zabojnik of the University of Southern California offer a more sensible explanation: Our new global high-tech economy, companies are less likely to promote insiders who may be chummy with the board and instead pick CEOs outside not just the firm but even the sector--take Alan Mulally, who came to Ford from Boeing.

These talented generalists are scarce and can have a huge effect on profits. Sure, they command high pay. Too high? The Yankees' Alex Rodriguez earned $29 million from June 2005 to this summer. Jeff Immelt of General Electric makes less than Dr. Phil does. If a good CEO can boost profits by $200 million, he's easily worth $10 million, or more.

Certainly, some CEOs, like some ballplayers, make more than they deserve. Angry shareholders have a remedy--dump the stock. The bigger problem, as we show in The American, the magazine I edit, is that publicly traded companies--because of pressure from politicians, the media and unions--could be underpaying CEOs. The best and brightest managers are migrating to private-equity firms, hedge funds and privately owned businesses out of the spotlight.

With 5% of the world's population, the USA is home to half the world's largest companies. Our system of compensating CEOs has served the nation well. Let's not let politicians mangle it.

James K. Glassman is a resident scholar at AEI and editor in chief of The American.