The large gap between American CEO pay and foreign CEO pay is one of the biggest puzzles in executive compensation. Recent scholarship has suggested that it is the result of board capture. This theory claims that the pay gap arises because in the U.S. passive friendly directors award their CEOs huge pay increases, while in other countries tight-fisted control shareholders suppress CEO pay levels. This paper criticizes Capture Theory and then develops four market-based theories that offer persuasive alternative explanations for the international CEO pay gap. It argues that market forces will determine whether the pay gap will disappear and that current proposals for government intervention will be at best ineffective, and more likely counterproductive.. I. INTRODUCTION One of the most puzzling aspects of executive compensation is the pay gap that exists between American and foreign Chief Executive Officers (CEOs).1 U.S. CEOs are paid vastly more than their foreign counterparts: they have higher base salaries, they receive larger bonuses, they get more stock options, and they are given bigger chunks of company restricted stock.2 Commentators3 and the financial press4 have been quick to claim that such differences can be explained by Board Capture, a theory that claims powerful American executives take advantage of weak domestic boards of directors and passive, dispersed shareholders to overpay themselves exorbitantly.5 According to Capture theorists, American CEOs orchestrate the appointments of their obedient subordinates as inside directors and of friendly, passive outside directors. The net result is a board comprised of compliant directors and a Compensation Committee that lacks the aggressive hard-nosed negotiators needed to keep executive pay in check. To make matters worse, the Compensation Committee's advisors, usually paid consultants from a handful of well-known firms, have conflicts of interest that preclude them from giving truly disinterested advice. They tell directors to rely upon industry surveys of pay levels that have the (un)intended consequence of constantly ratcheting executive pay levels upward.6 American CEO pay levels have skyrocketed, they claim, as a result of this process. The international pay gap arises, the story goes, because foreign CEOs do not have the same power over their boards.7 In most foreign corporations, control shareholders act as strong checks on executive pay. Control shareholders will recoup most of the firm's rents and therefore have strong financial incentives to keep executive pay abroad at more reasonable levels. Thus, by comparison to U.S. CEOs, foreign CEOs are paid less. In the wake of Enron, Global Crossing, and the host of other financial scandals, and the anecdotal evidence surrounding the abuse of corporate perks and compensation schemes that has surfaced in their wake, Capture Theory has caught the public's attention. Executive compensation has been painted as the symbol of out-of-control greed in corporate America. People here and abroad want to believe that American CEOs have been playing a one-sided game, and have been winning without really having to work hard for their pay. Capture Theory provides an argument supporting these claims. This Article presents the first comprehensive theoretical analysis of the international pay gap.8 It is critical of the Capture explanation and offers several more plausible market-based theories that explain this phenomenon. The problem with relying solely on board capture as an explanation is that, while it may lead to some inflation in U.S. CEO pay levels, it does not fully explain the CEO pay gap. For example, Capture Theory does not tell us why executive pay in the U.S. grew so rapidly after the early 1980s.9 There is no evidence that CEOs' power over their boards grew during this time period; in fact, most evidence is to the contrary.10 Nor does Capture Theory offer a persuasive explanation of why bigger firms pay their executives more than smaller ones, or why the supply of executives has not dramatically increased in response to the alleged huge rents that CEOs have been receiving for the last twenty years. …