I. RECENT TRENDS

Executive compensation, while always high, increased dramatically in the last decade of the 20th century. As illustrated in Table 2.7, mean (median) compensation more than quintupled (tripled) over just an 8-year period from 1992 2000. ^[1] This despite the outcry in the early part of the decade over excessive compensation, an outcry which led to increased Securities and Exchange Commission disclosure requirements, Internal Revenue Code restrictions on the deductibility of executive compensation, and Financial Accounting Standards Board modifications in the accounting treatment for employee stock options. Table 2.7 also shows that although each component of the compensation package increased over the 8-year period, the increase in compensation was primarily driven by stock options. That is, while mean total CEO compensation increased from $1,689,000 in 1992 to $8,466,000 in 2000 for an increase of $6,777,000, the value of stock option grants increased from $592,000 in 1992 to $5,589,000 in 2000 for an increase of $4,997,000. Thus, just under 75% of the increase in the value of the CEO compensation package came from the increase in the value of stock options granted.

This increased level of compensation from stock options was driven by both the increase in the value of the options granted ^[2] and an increase in the number of options granted. Holding the number of options granted constant from year to year, ^[3] a rising stock market, as occurred during the 1990s,...