Glaring Problems with Survey Data

Mark Van Clieaf is a Managing Director of MVC Associates International

After reviewing a number of recent confidential executive compensation reviews for clients from brand name compensation consultants, it would appear that this data is not sufficient to provide sufficient input for boards for them to be able to properly determine equitable versus excessive compensation or properly tie pay-to-performance.

This conclusion rests on four observations:

1. Lack of Accountability Definitions - The accountability of the roles being benchmarked by compensation consultants have not been clearly defined – thus, there is no executive position analysis to define which roles within companies being compared (either internally or externally).

   As we all know, the accountabilities attached to a particular title (CEO, COO, President) might vary widely from company to company. Revenue, market cap size, and reporting structures of themselves do not drive position complexity.

   Rather, position complexity determines the Organization Value Added-OVA™ of a job - not the size of business, budgets, team.

   In the surveys that I have reviewed, there are no job factors disclosed to help that similar roles are being compared nor are there any factor analyses to calibrate positions with the same title, but different levels of complexity.
   
   

2. Lack of Consideration for Company Complexity - In the surveys that I have reviewed, the choice of benchmark peers (from which percentiles, averages and medians are developed) appear to be focused on companies in the same industry with no regard to the complexity of the enterprises / roles being benchmarked versus size. 

   Yet, size (revenue, market cap, etc.) and complexity (distinct number of businesses operating on two or more continents) are not the same. Thus, the peer group is really not a true peer group for the purposes of position comparison.
   
   

3. Too Much Reliance on Titles - Although the survey and proxy comparator data in the surveys that I have reviewed illustrate the revenue and market caps for each comparator company, it appears the only factor to match the compensation data (base, total cash, total direct) with the position being evaluated is the title of similar positions held at benchmark companies.

   The above practices result in creating compensation percentiles and averages, that are not defensible comparisons, and lead to decision making that drive the ratcheting effect of compensation that is so wide spread.
   
   

4. Different Peer Companies Used for Different Purposes - In surveys that I have reviewed, there was no 3-5 year business (NOPAT, ROE, ROIC) or stock market (TSR) performance data tied to the companies that are benchmarked for compensation purposes. There wasn’t even a comparison of the performance metrics that were disclosed in the proxy statements filed by the benchmark companies.

   Companies can fall into one of four categories based on multi-year performance of Market Value Added (Total Enterprise Value determined by equity markets minus all Capital invested) and Economic Profit (Net Operating Profit After Tax – Cost of Capital). The following are the % distribution of the top 700 U.S, companies by value category over 5 years of performance ending in 2002.
   
   

   Value Category	MVA	Economic Profit
   Value Builder –    24 %	Positive	Positive
   Value Myth –       14 %	Positive	Negative
   Hidden Value -     17 %	Negative	Positive
   Value Destroyer-  45 %	Negative	Negative

   Today, surveys used by compensation consultants do not distinguish among these categories of 3- to 5-year true value creation and the linking of pay with performance (value creation).

   Value Builder’s should be paid more than those that fall within the other value categories.  Mixing them up with the other categories for compensation benchmarking contributes to "pulling up" the compensation averages and percentiles of poor-performing companies to justify compensation levels that are competitive, even though there is no demonstrable link to business operating performance and equity market performance.