Favoritism, cronyism or more like it would actually be described by the people who do it, a preference for trusted associates you've worked with in the past over strangers to run your stuff for you isn't a violation of your "market freedom" but rather an expression of a set of preferences that make all your choices incommensurable. P.S. it is not in the interest of investors for one employee to make way more money than normal it's just that nobody knows how to avoid it when that employee is the center of decision-making. The kids of yesterday's owner-operators have an entirely different set of preferences from their parents due to being real, "classical" capitalists... Which makes the focus on CEOs kind of ironic! Technically they're workers who escaped the cruelty of a liquid market.

Employees at the bottom of the pyramid can make bullshit excuses too, but it is a privilege of the upper layers to have no one in a position to call them out.

> it is not in the interest of investors for one employee to make way more money than normal it's just that nobody knows how to avoid it when that employee is the center of decision-making

See "A Principled Approach to Executive Pay", Chapter 1.F in The Essays of Warren Buffet, arranged by Cunningham.

The issue I take with your line of reasoning is that executive compensation is often at odds with investor interests in more ways than just its amount. Buffet describes "heads I win, tails you lose" executive compensation plans in an essay from the 80s/90s. He describes how they do things at Berkshire Hathaway - they're doing very well and I doubt have any issue recruiting good executives.

Despite this, and decades later, we see terrible compensation plans being approved by boards. We see executives exiting failed businesses with enormous paychecks. We see boards offering those same executives new management positions with terrible (for investors) compensation plans. What gives?

It certainly looks like cronyism to me, but maybe I ought to be applying Hanlon's Razor.

I am not really so much disagreeing with your analysis as I am pointing out that,

1. Cronyism looks like something totally different if you are inside of it or close enough to see it, which helps explain why it can happen.

2. The "economics 101" picture has no problems with adapting to non-financial preferences like nepotism. In fact the basic models make no statement about why buyers would prefer one thing over another whatsoever.

Cronyism isn't an exception to microeconomics, it's a lesser-known example of a consumer preference. In this case the board has a... preference... for cronies. :-)

Yes, I believe that is exactly the point: the invocation of econ 101 as explaining away all the iniquities of life as "simply how the world works" is simply a veneer of objectivity over what is just cronyism and imbalances of power and oppirtunity.

Yeah it’s like trying to apply supply and demand to politican’s wages. Company directors and executives set their own wages using others’ money. It’s obviously not a market.

Supply and demand work better in government jobs if you include esteem and authority as part of the "compensation package," really just a jargon term for the list of reasons why someone would want to do something. Otherwise, it'd be impossible to explain why anyone would work for the CIA or serve as an army officer, neither of which are remunerative (or take a job at JPL for that matter).