This assumes good competition among CEO compensations. But when I say "game", I mean that there's essentially a cartel of CEO compensation among all publicly traded companies, so that you can not just invest in a company which does not overpay the CEO.
Oh really? Google and Apple's CEOs make $1.
Forbes regularly profiles companies whose CEOs make significantly less (and more) than what you claim is the only game in town.
And if you think that other countries do it better, you can buy stock in many of their companies via ADRs. (IIRC, Japan's CEO pay works somewhat like you'd like.)
I note that you didn't acknowledge that CEO pay practices don't have investor benefits, so why do you care? More to the point, since you can easily choose companies that work the way that you'd like, why should my choices be limited?
There's more info in this Motley Fool article: http://www.fool.com/investing/general/2010/06/18/dont-let-wa...
Even huge pension funds typically hold no more than 0.3% to 0.5% of large and medium-sized companies, so it's impossible to picture that happening very often.