Members of BBC management had their pay frozen in 2009
The BBC's director general has defended the salaries paid to its top managers, saying they could earn considerably more in the private sector.
Mark Thompson was responding to questions from the novelist PD James, who is the guest editor of BBC Radio 4's Today programme for the day.
The former BBC governor said it was extraordinary at least 37 BBC managers earned more than the prime minister.
But Mr Thompson said the BBC was still losing key staff to its rivals.
During the interview, Lady James, who was a governor of the BBC from 1988 to 1993, suggested the organisation had lost its way. She said while it was easy to name some programmes of superb quality, others hardly qualified as public service broadcasting.
She asked how Mr Thompson could justify what she called the "extraordinarily large" management salaries. She said they were of immense concern to many people.
Mr Thompson said the BBC was competing with commercial companies for the best people to deliver the best programmes and services.
"If you want to have the best people working for the BBC, delivering the best programmes and the best services, and if you also accept that means particularly at a moment in broadcasting history where people can move very freely from the BBC to other broadcasters and back, the BBC has to bear, to some extent, in mind the external market."
He said the controller of BBC One, who is responsible for an annual £1bn programme budget, took a pay cut to come to the corporation and that most managers received less than they would outside.
Therefore, he said, "you really want to make sure you've got the very best person doing that job.
"I think it's a false economy to say 'well you know what, we're not going to have anyone as controller of BBC One who earns more than £100,000 a year' because in my view you won't get the right candidate for the job."
But Lady James said it was more a question of individuals earning £400,000 a year and "one wonders what exactly these people are doing".
She added: "If people are on £200,000, £400,000 a year, where are they going to go outside that's going to pay them more than that? I don't see where these jobs are in the private sector."
Mr Thompson replied: "We are still absolutely losing key staff to commercial broadcasters who are still paying top dollar."
He accepted that public service bureaucracies were a "many headed hydra" in which costs were sometimes difficult to keep down.
"Over the last five years we've tried to reduce our overhead costs.
"One of the things that we're looking at is whether we can simply make an auditable, fully accountable commitment to how much of the licence fee we actually spend on content."
Lady James said those earning about £400,000 could not think they were performing a public service "if in fact that is over-payment for what you're doing".
Working for the BBC should be a "privilege," she added - a statement which Mr Thompson said he agreed with.
The expenses and salaries of the BBC's 50 top-earning managers were revealed in June.
Additionally, the salaries and expenses of the BBC's top 100 executives and decision-makers will be published, quarterly, from September.
Mark Thompson's salary in 2008/9 was £834,000. Prime Minister Gordon Brown is paid £197,689.