The market may be less arbitrary than specific regulation, but is, nonetheless, an evolving artifact, not a given. They’re not always self-correcting; they’re not always the best means of distributing resources.
The compensation is legal, and the shareholders are being directly harmed by it. It’s their money that’s being dished out by the bucket load. (A search on “shareholder activism” may kick out a few more convincing arguments.)
Society is being harmed by it, to the extent that a reasonable degree of economic in/equality is a component of a healthy society. Disparities of wealth & reward of this degree aren’t so much a spur to succeed as they are a slap in the face.
The companies are being harmed, to the extent that they–or the stock market–buy into the notion of the ‘great leader’. That sort of thinking helped can Douglas Ivester at Coke following Roberto Goizueta’s death, and Coke’s been a basket case ever since. When Jack “Manager of the Century” Welch left GE, it’s stock dropped and didn’t regain lost ground for a year. Maybe not a big deal considering the growth GE enjoyed during his tenure, nor considering that the stock price is higher today than it was when Jack left. Nonetheless, the sudden loss of faith in the guy at the top was an obvious challenge. (Jack’s reputation took something of a dive following retirement as well… a necessary downward correction, I think.) Also off the top of my head, Michael Eisner played nice with his management team at Disney until, apparently, he learned to love the CEO super-star limelight. Playing the great man ended up costing the company personnel, money, and Mike his job.
CEOs are important, but they’re not worth this much.