Tim Harford (The Undercover Economist) uses “tournament theory” to explain Why Your Boss Is Overpaid:
Lazear and Rozen’s tournament theory has stood the test of time and been supported by many subsequent pieces of empirical research. It also passes the smell test: The more grotesque your boss’s pay and the less he has to do to earn it, the bigger the motivation for you to work for a promotion. As Lazear wrote in his book, Personnel Economics for Managers, “The salary of the vice president acts not so much as motivation for the vice president as it does as motivation for the assistant vice presidents.”Economists don’t even pretend that your boss deserves his salary. Suddenly, everything is clear.