All employees perform at higher levels when they are eligible for performance-based short-term and stock-based incentives. This common framework makes it possible to align executive pay with pay for broader employee groups and provide sharply higher pay for top performers at all levels – crucial elements in a company's success.

Unfortunately, most of the controversy surrounding executive pay in recent years has focused on ways to create a false alignment by regulating the compensation process and limiting the amounts of pay that would otherwise be set by market forces.

Critics argue that by lowering executive pay, morale – and therefore productivity – will be higher because employees will believe that they are being treated fairly. There is no empirical evidence to support this position. Studies of internal pay equity and perceptions of fairness show that employees focus on the effectiveness and fairness of the performance measurement and evaluation process rather than the actual amounts of compensation.

In other words, companies should strive to create alignment by making nonexecutive compensation more like executive compensation instead of by restricting executive pay.