Comparisons to Peer Groups Hike CEO Pay

by Mark Friedman  on Monday, Oct. 15, 2012 12:00 am  

Charles Elson of the John L. Weinberg Center for Corporate Governance said pay continues to rise for CEOs.

Few companies can be compared with Wal-Mart Stores Inc.

With $443.9 billion in sales for its fiscal year that ended Jan. 31, the Bentonville retailer is the biggest retailer in the world and typically No. 1 or No. 2 among corporations in any industry.

But when it comes to calculating how much Wal-Mart CEO Mike Duke will earn in total compensation, Wal-Mart’s board of directors’ compensation committee considers what similar companies are awarding their CEOs and compares that with Duke’s pay.

The practice, known as peer group compensation benchmarking, is the reason CEO pay has climbed to stratospheric levels in the last two decades, according to a recent study, “Executive Superstars, Peer Groups and Over-Compensation — Cause, Effect and Solution.”

“We find that peer group comparisons are central to the CEO ‘mega pay machine’ problem,” Charles Elson, an author of the study, said in a Sept. 24 news release. Elson is a director at the John L. Weinberg Center for Corporate Governance at the University of Delaware. Craig Ferrere, who is a fellow at the center, also is an author of the study.

Duke’s total compensation in 2011 was $18.33 million, down slightly from the $18.7 million he received in 2010, according to the company’s filings with the Securities & Exchange Commission. That includes salary, bonuses, stock options and awards and any “other compensation” that company reported to the Securities & Exchange Commission, as well as the value realized from exercising stock options in 2011.

By comparison, the CEO of Arkansas’ second-largest retailer, William T. Dillard II of Dillard’s Inc. in Little Rock, received $15.2 million in total compensation for 2011, a 275 percent increase from 2010. Dillard’s Inc.’s annual revenue, $6.3 billion in its most recent fiscal year, was only about 1.5 percent that of Wal-Mart, and its profit, $644 million, was less than 3 percent of Wal-Mart’s bottom line, $15.77 billion.

Wal-Mart’s compensation committee said in the company’s annual proxy statement that Duke’s compensation was in the top quartile when compared to CEOs in 23 retail companies that had more than $10 billion in annual revenue, such as Inc. of Seattle and the Kroger Co. of Cincinnati.

But his compensation was between the 50th and 75th percentile of peer groups when compared with 29 companies in the Fortune 100. Those companies included News Corp. of New York and Tyson Foods Inc. of Springdale. Wal-Mart’s committee also found the Duke’s pay was between the 50th and 75th percentile when compared to CEOs at the top 50 companies based on market capitalization. (See How Wal-Mart Determines Pay .)

The Associated Press reported in May that CEOs’ pay had climbed an average 6 percent compared with the previous year. The AP, which uses its own formula to calculate executive compensation, looked at 322 companies in the Standard & Poor’s 500. The median CEO pay, the AP found, was $9.6 million.

“The amount of money the CEO makes today is too much,” Ferrere told Arkansas Business last week. “The problem is the CEO is a product of an organization, and the pay should be based on what’s appropriate. I think we’ve got into a situation where it’s diverged from what it should be.”

But Scott Cross, managing director of Frederic W. Cook & Co., which provides executive compensation consulting services, defended the peer group practice. He said boards of directors have to look at what other companies are paying their CEOs to remain competitive. He also said companies look at other companies’ salary schedules to calculate the annual salaries for positions from accountants to CEOs.



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