The vast majority of people expect that people of higher rank, authority, or responsibility will be paid more. How much more? W. Edwards Deming suggested that once the CEO's compensation goes beyond approximately 20 times the wage of the average employee that a sense of inequity prevails. Warren E. Buffett has called executive pay the acid test of governance,19 and " often tells corporate chiefs to end practices ranging from huge CEO pay to incomprehensible financial reports."20 The higher the gap between CEO pay and that of the worker, the greater the sense of inequity and unfairness that's likely to be present, reducing morale and productivity. And, the greater the inequity, the more militant unions will be. All this detracts from the success of the company.

As shown below, there continue to be huge increases in CEO compensation, with the average pay for CEOs of publicly traded companies somewhere between 160 and 600 times that of the average company employee, a huge increase over the rank and file pay. The thinking behind this shift in CEO compensation is apparently to provide incentives and rewards for CEOs that achieve exceptional results, those results being reflected in the company's stock price and shareholder wealth. However, this concept seems to ignore, or at least not fully recognize, a number of principles, all of which do need to be recognized, as a matter of policy, in setting CEO compensation:

1. First and foremost, as the lead representative...