There are two broad approaches to the topic of executive compensation.

First, the neoclassical theory which provides an economic analysis of

managerial renumeration. Second, psychological and sociological theories,
such as social comparison theory, equity theory, and Simon's hierarchical pay
structure model,

Proponents of the neoclassical theory of the firm suggest that the goal of
the firm is to maximize profit, and therefore, shareholders' wealth. From this
perspective, all illlegal business behaviors which are aimed at maximizing
profit are in a fundamental sense, ethical. For example, Stieber (1987)
suggests that the profit maximization model of the firm can serve as a
standard of efficiency against which all other organizational behavior can be
judged. In a competitive market environment, profit maximization is
possible only if one can produce goods at the lowest possible cost (cost
minimization). This process, in turn, enables the consumer, given their
income, to obtain the highest possible level of welfare (in the language of
utilitarians, "pleasure)!

Simon provides a sociological view that compensation levels for entry

level managerial positions are determined in competitive markets, and
therefore are constant across companies and industries. "appropriate
differentials in salary exist between an executive and his immediate
subordinate, measured not in absolute terms, but as a ratio," with the
particular ratio varying across companies. In Simon's framework, the
steeper the organizational hierarchy, the greater the chief executive
officer's salary is likely to be.From the perspective of the economic
efficiency argument, Simon's descriptive model of executive compensation
is unethical. It is unethical because the CEO is paid not on the basis of his
contribution to output (i.e. the value of his marginal revenue pro-duct), but
rather on the bases of self-serving hierarchical structures that consume the
resources of the firm and result in higher unit average costs for the
production of goods and services

According to the social inequity theory, whenever one perceives the ratio
of his output to his input to be unequal to another person's ratio of output
to input, inequity exists.
 Social comparison theory (O'Reilly et al., 1988; Weiss and Shaw, 1979;
Salancik and Pfeffer, 1980) is a variant of Adams's inequity theory, and
provides a socio-psychological explanation of compensation. This theory is
based on the premise that individuals have a need to evaluate their
opinions and abilities. They choose others who have similar abilities and
opinions as standards for comparison. In the case of the CEO, the
implication is that the compensation committee of the board of directors will
anchor the CEO's renumeration based on the constituent member's pay, or
based on the pay of a CEO who is perceived to be similar or slightly better.In
this case shareholders' rights are violated when a CEO consciously attempts
to select highly paid individuals to be directors, and thus engineers his own
pay package.