the average CEO earned 42 times the average worker. By 2001, the ratio had ballooned to 411-to-1. To put that in perspective, by late afternoon on January 1, in many companies the top executive has already earned more than the average worker will earn for the entire calendar year.
The previous paragraph implies that corporate executives are being excessively compensated. The issue of executive compensation boils down to essentially one premise: executives should be compensated based on their job performance as determined by financial measures such as stock market performance, revenues, or profits. Some aspects of executive performance, like knowing when to cut costs through layoffs, necessitate making tough decisions. Therefore, to base a CEO's compensation solely on stock performance when the company is undergoing fundamental change resulting in short-term losses to ensure long term success, it would be unfair to look only at stock price or profits when determining the rate of increase for the CEO or senior executive because in this scenario the CEO's real value lies in their ability to properly manage change.
By 2002, average executive compensation was about 200 times that of the average employee. On the surface, this appears excessive. However, if most of the executive compensation is centered in stock options the changes in compensation during the boom of the 1990s can be attributed in large part to a hot stock market. As a result, stock options issued during these years rose in value right along with the general stock market. Thus, a large share of the rise in executive compensation can be directly traced back to the issuance of stock options.
However, stock options are not as popular for middle managers and lower level employees. Leo Jakobson and Jeanie Casison writing in Incentive (2004) explain that many companies are cutting back on stock options, at least among middle managers and workers. Reporting on a recent s...