The Advisors' Blog

– Broc Romanek, CompensationStandards.com

A new study – entitled “Executive Superstars, Peer Groups and Over-Compensation – Cause, Effect and Solution” – examines flawed peer group methodology, finding that CEO pay has become untethered from both broader organizational wage structure and from economic fundamentals due to the use of peer benchmarking. Funded by the IRRC Institute, Professors Charles Elson and Craig Ferrere of the University of Delaware wrote the study. Here’s a NY Times article about the study from yesterday – and here’s the IRRC press release.

This new study makes it clear that peer grouping with minimal board discretion is a seriously flawed methodology even when the peer groups are fairly constructed. The authors note their study is the first to document that peer group benchmarking has accidentally become the de facto standard even though it never was designed to determine CEO compensation.

The fact that most CEOs aren’t transferable is something that we have been saying for a long time (eg. this blog). And we also have been warning compensation committees that if they rely heavily on peer groups – and don’t use alternative benchmarking techniques like internal pay equity instead – they can be in trouble in court since so many have warned that pay has skyrocketed over the past two decades due to peer group benchmarking. In other words, it arguably isn’t reasonable to rely on peer group surveys any more (here’s my latest rant on this topic). Will boards and their advisors finally wake up on this issue? They should before the lawsuits come – because then it will be too late…