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Benchmarking of CEO Pay Questioned

Using peer groups to determine executive compensation leads to inflation, a study charges.

By Dave Lindorff | Updated on November 27, 2012
Peer Pay BenchmarkingExecutive compensation and how to determine it remains a hot issue. A recent survey by Institutional Shareholder Services (ISS) finds executive pay is the top governance issue cited by institutional investors in both North America and Europe. The issue ranks second after board independence in the Asia-Pacific region and developing markets. Meanwhile, a controversial research paper by the University of Delaware’s John L. Weinberg Center for Corporate Governance claims the standard board practice of using groups of similar companies as a benchmark to determine CEO compensation is unjustified and leads to escalating compensation levels.

Charles Elson, chair of the Weinberg Center and co-author of the study published in August, says the basic premise of using peer-group benchmarking is flawed. It’s not just that selecting the companies to include in a peer group invites manipulation of the results, Elson says. Nor is it that compensation is typically set at the 50th, 70th or 90th percentile found in the peer group, he says, though “that is like Prairie Home Companion saying, ‘All the children are above average.’ It leads to a ratcheting up of all CEO salaries.” 

Rather, Elson argues, the notion that CEOs can easily move to the top position at another company is not accurate. “There is really no external market for CEOs,” he says. “The skills of a chief executive are company-specific, involving experience, the relationships with other managers and executives and the culture of the company, and the odds of a CEO leaving a company over compensation are slim to none.”

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