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.

“We have to understand what the competitive market is,” Cross said. “That would include companies of similar size, complexity [and] the scale of the company.”

But if the CEO isn’t performing at a high standard, “then you would expect for him or her to be paid at the lower end of this range of compensation,” Cross said.

Part of the reason for the high pay is the fear felt by company directors that their CEO will leave for another company, Ferrere said. “I think there’s a perception that if you don’t pay what everybody else is paying, then you’re going to lose your CEO,” he said.

But that’s not the case, according to the study.

“The findings are that CEOs don’t move and jump as often as we’d imagined,” Ferrere said. He said such moves had happened only in a handful of cases in the past 20 years.

The “Executive Superstars” study suggested that the CEO’s pay should be determined by internal company metrics, not based on what another company is paying its CEO.

A CEO’s eye-popping pay ultimately hurts shareholders and demoralizes the employees in the organization, Elson said in an interview with Arkansas Business. “If you can’t get your employees to get excited about the company, who will be?” Elson said. “How do you make profits?”

Showering the CEO with money also sends the message that “this guy is the only one that can run the company,” said Paul Hodgson, who studies executive compensation for GMI Ratings of New York. GMI Ratings researches environmental, social, governance and accounting-related risks affecting the performance of public companies.

Peer Group Metrics

After World War II through 1970, executive pay was “modest” and relatively flat, according to the compensation report. But after 1970, CEO pay started climbing.

“During the 1990s the annual growth rate in median pay reached about 10 percent,” the report said. CEO compensation rose from a median of $2.3 million in 1992 to $7.2 million by 2001, the study said.

One of the reasons for the dramatic increase in CEO pay was the practice of consultants relying on industry and market analysis to compare the executives’ pay to executives at other companies.

 

 

Please read our comments policy before commenting.