According to one embodiment, there is provided a device and method for correcting code wheel misalignment which employs upper and lower code wheel misalignment photodetectors positioned above and below at least first and second motion detection photodetectors. According to other embodiments, there are provided a device and method for automatically setting the gain of an output circuit in an optical encoder. Still further embodiments of optical encoders combine the code wheel misalignment and automatic gain control features of the invention.