Time Warner has just revealed that, as part of his new employment contract, Chief Executive-elect Jeff Bewkes will receive a minimum salary and target bonus of $10.25 million next year. A pay package this size is now so typical for CEOs that the annoucement barely raised an eyebrow.

In “Supercapitalism” I explain why CEO pay has reached such absurd levels. The Wall Street Journal recently ran an excerpt from the book under the heading “CEOs Deserve their Pay.” Some of you have written to me, wondering if I’ve gone mad or, even worse, become a right-winger.

Despite the Wall Street Journal’s headline (which I had no say in) there’s an important difference between explanation and justification. Markets have lots of effects that cannot be justified morally – a point that market fundamentalists on the right often fail to acknowledge. One of the biggest of such effects is CEO pay, and the growing gap between it and the wages of average workers. Every two weeks Lee Scott, Jr., of Wal-Mart, rakes in roughly the same amount his average employee earns in a lifetime. That’s a bigger gap than used to be the case, even at Wal-Mart. Is it because CEOs such as Scott – or Bewkes at Time Warner – have become greedier than they used to be, or so much more adept at packing boards with cronies who will award them princely sums? I doubt it. CEOs have always been greedy, and they used to have an easier time hand-picking their boards than they do now in the post-Enron era.

A simpler explanation is that boards of directors choose their CEOs from a relatively small pool of proven executive talent. Few executives have been tested and succeeded at the top job. Boards don’t want to risk error. The cost of recruiting the wrong person can be huge. For Time-Warner, for example, Bewkes is a relatively safe bet given his management experience. Under super-competitive capitalism, boards are willing to pay more for CEOs because their rivals are paying more – and the cost of making a bad decision is so much greater than it was decades ago when competition for investors and customers was far less intense and shareholders were far more placid.

This doesn’t mean CEOs are Nietzchean supermen or women or that a company’s overall performance depends entirely on the wisdom of a single head honcho. It just means that boards of directors are now subject to the same dynamic as Hollywood studios, which are paying lots more for celebrities than they did years ago. As the New Yorker’s James Surowiecki has reminded us, Clark Gable earned $100,000 a picture in the 1940s, which translates into roughly $800,000 today. But that was when Hollywood was dominated by a handful of big studios. Today, Tom Hanks makes closer to $20 million per film. Movie studios are now competing intensely not only with one another but with every other form of entertainment. They’re willing to pay Hanks and other celebrities these colossal sums because they’re still small compared to the money these stars bring in and the profits they generate.

Some CEOs do hand pick their boards and their compensations committees. But that’s not the real explanation, either. Last year, Ford Motor – which as everyone knows has been slashing its payrolls – gave its chief executive, Alan Mulally, a $2 million “base salary,” $7.5 million as a signing bonus, options and stock units valued at more than $15 million, and more than $11 million worth of other perks and benefits, for a grand total of around $36 million. Did the Ford board offer Mulally this much because Mulally had filled the board with golfing buddies? No. He hadn’t even worked at Ford before being offered this package. It was put together by Ford’s board in order to lure Mulally to Ford from Boeing. Mulally had done well at Boeing, and Ford was desperate to find someone who could turn around the company and, just as importantly, convince Wall Street it had found someone who could turn around the company. Is Mulally “worth it” in social or moral or ethical terms? Of course not. Is it nonetheless understandable that Ford’s board felt it needed him, and therefore was willing to pay him this much? Sadly, the answer is yes.

As we witnessed with Enron, Some CEOs manipulate balance sheets. We’re seeing something of that now with financial companies (see two blogs ago). But that’s not the heart of it, either. The real explanation for soaring CEO pay is simply a matter of supply of demand.

This doesn’t make it right; it only makes such pay understandable. But it does suggest we can’t rely on shareholders to respond to the ethical and social wrong of such CEO pay – and why the real answer is a much higher marginal tax on the super rich.