Steve Kaplan misses an important point when he posits that only the “external equity” or the market should determine how much a CEO is paid. If companies don’t also focus on “internal equity”–how the highest paid executive’s pay compares with that of everyone else in the organization–they risk losing their own staff’s dedication and focus.

Indeed, a bias to focus only on the external market in recent years has helped push executive compensation way out of whack. Because of the yawning gap between the leaders and the led, employee morale is suffering, talented performers’ loyalty is evaporating, and strategy and execution is suffering at American companies.

Employees really do care about this issue, and a smaller gap makes for greater solidarity, and as a result better performance, throughout the workplace.

At Whole Foods, we’ve made adjustments to keep the external and internal equity perspectives in balance. We have a salary cap–the maximum allowable ratio of the highest cash compensation to average employee cash compensation–to address internal equity. But that cap has increased over the years so that we can help avoid the loss of valuable executives. Twenty years ago, when we were only a fraction as large as we are today ($40 million in sales then compared to $8 billion now), the salary cap ratio was 8 to 1. Today it’s 19 to 1. That puts the maximum cash compensation anyone can make at Whole Foods at about $650,000.

Is this cash compensation too low to retain top executives? Apparently not, because Whole Foods has never lost to a competitor a top executive that we wanted to keep since the company began more than 30 years ago.

The truth is that maximizing personal compensation is not the only motivation that people have in their work. As we move up Maslow’s Hierarchy of Needs, we discover that once our basic material needs are satisfied, money becomes less important to us. In my experience, deeper purpose, personal growth, self-actualization, and caring relationships provide very powerful motivations and are more important than financial compensation for creating both loyalty and a high performing organization.

It’s also a great exaggeration to argue, as Steve does, that “market forces” are the primary reason CEO pay has increased so much. Many studies (for example, Lawrence Mishel’s study “The State of Working America 2005, 2006”) show that back in 1965 the ratio between CEO pay and average company pay was 24 to 1. By 1980 the ratio had increased to 40 to 1. The ratio tended to increase every year, and in 2000 it had increased to 300 to 1. Over the past 10 years the ratio has bounced around considerably but is currently close to that peak of 300 to 1.

If CEO compensation is primarily driven by competitive markets, then how come the ratio was only 24 to 1 back in 1965 and is about 300 to 1 today? Surely the market demand for good CEOs is no greater today than it was 45 years ago or 25 years ago. Are CEOs today really worth that much more than their comparable peers were worth just a few decades ago?

It’s also illuminating to consider how much American CEOs get paid relative to CEOs in other countries. Mishel’s study shows that the average American large-company CEO makes on average 225% more than the average large-company CEO in the other 13 largest industrial countries. Are American CEOs really that much more valuable than CEOs in other industrial countries? Are these differences in CEO pay really being determined by competitive markets, or are other factors distorting markets?

The essence of the problem with CEO compensation is that the owners of our public corporations, primarily institutional investors, who own more than 70% of the stock, have very little incentive either to make long-term investments in companies or actively serve on their boards of directors. This means that the owners of our public corporations are seldom actively involved in corporate governance or in closely monitoring executive compensation. If they are unhappy with a company they usually just sell their stock. Instead the burden falls almost entirely on the directors, who are effectively self-elected, since institutional investors seldom oppose the board’s slate of directors. The outside directors of most of our corporations also seldom have large ownership stakes in the companies they serve. While most outside directors are well intentioned and are usually highly capable, their own interests can sometimes diverge from the interests of the owners. I’ll put up another post later in the debate to detail my other suggestions for fixing CEO compensation.

John Mackey is the chairman and CEO of Whole Foods Market.