There are a lot reasons why executive overpay makes CEOs perform worse at their jobs. Foremost among them is that it enables them to make short-term plays that are risky or harmful to the company in the long run. A $500,000-per-year job is one that an executive desperately wants to keep. A $25 million-per-year job, with four years' pay as a golden parachute, is one that can safely be blown up after a couple years. (No CEO intentionally blows up, but many take stupid risks driven by ego and status-based avarice that they would be less inclined to take if paid modest salaries and thereby more attached to their jobs.)
There are two reasons why executive overpay exists. The first is self-dealing by a small, socially closed elite. They do it because they can. The second is to motivate younger people who greatly overestimate their chances of ascending to such ranks: printing dreambucks, I call it. I would argue, were it not for the cultural corrosion the overpay causes, that executive pay is actually a very, very cheap mechanism for achieving the 2nd goal. Overpaying executives does motivate people to want to get to that rank. The problem is more subtle and cultural: what does it motivate them to do? Be more creative? No. Be more ethical? Certainly not. Be more ruthless? Sure, but "ruthless" is a hair's breadth away from psychopathic and workplace psychopaths (cf. Fiorina) can destroy companies.