Paul Krugman: Incentives for the Dead

October 20, 2006

I don’t know about you, but I need a break from political scandals. So let’s talk about private-sector scandals instead — specifically, the growing scandal involving backdated stock options, which this week led to the resignation of William McGuire, the chief executive of UnitedHealth Group.

To understand the issue, we need to go back to the original ideological justification for giant executive paychecks.

In the 1960’s and 1970’s, C.E.O.’s of the largest firms were paid, on average, about 40 times as much as the average worker. But executives wanted more — and professors at business schools provided a theory that justified much higher pay.