Essentially the same as you determine salary at any other company:
In the early days there's no structure, you just get on with it. As the company grows, generally a board of directors (or non-profit: board of trustees) act as an independent governance level for the org above the exec team and (amongst other things) determine executive pay.
There is: A reasonable salary that's decided upon an an independent board of directors or an independent compensation committee based on evidence that that salary is in line with market rates for similar work.
CEO pay is always set by the board (the compensation committee is usually a subset of the board). It may be the case that the CEO demands certain comp and the board composed of their friends grants that request, but it's still the board.
Usually the yearly report for the company will show the salaries of all the top executives and board members. Not sure what the actual "law" is on that though.
It's questionable that a board has to decide between paying the herd of Exchange-fixing server-rebooting IT people and their executive. Most of the time the executive salary is set beforehand in board meetings, so it doesn't come as a surprise end of the year.
There is a tremendous amount of back scratching that goes on when setting executive pay.
The board hires pay consultants, the consultants are not going to rock the boat and suggest pay cuts, so they approve a nice increase over the current going rate. Rinse and repeat and you have out of control executive compensation.
Majority shareholders are often in the same position - very well paid, and well connected with other CxOs.
That leaves the rest of the shareholders along for the ride.
And the board's compensation committee is mainly executives from other companies, who want the executives on their board to also vote them a large pay raise...
It is simple collusion among the executive class, insulated from market forces, that determines executive compensation today. Shareholders are largely cut out of the loop.
While technically the board of directors sets executive compensation, one must remember that those board members are largely executives at other companies and the executives are often board members elsewhere. So in practice it’s a circlejerk and executives do set their own compensation via implicit quid pro quo.
Also, you appear to be confusing morality with legality. Screwing over line employees up to and including looting the pension funds to pay executive bonuses is legal (see Hostess bankruptcy for an example), but it’s also immoral.
> Board members typically don't get paid especially well... In the Fortune 500, it's a prestige gig as much as anything."
They get paid $100-250k for maybe 1 day a month of work and very little responsibility most of the time. That's a lot of money in absolute terms but maybe not relative to the total income of typical board members.
This is a very naive misunderstanding of how the labor market for executives actually works. Executive compensation is set by the Board. Who is the Board? They’re all CEOs of other companies, who have no interest in seeing executive pay tied to performance. This is all a you-scratch-my-back-I’ll-scratch-yours situation, from people all in the Good Old Boys network of Harvard and Stanford MBAs. Tying compensation to performance is in nobody’s interest in this network.
Wrong. Board of directors, who are elected by company shareholders, can limit executive pay. They do this constantly. I'm assuming you're very new to this.
In the early days there's no structure, you just get on with it. As the company grows, generally a board of directors (or non-profit: board of trustees) act as an independent governance level for the org above the exec team and (amongst other things) determine executive pay.
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