What's behind your CEO's fat paycheck?

High CEO pay is not always a result of favorable shareholder returns, notes a corporate governance expert

Concern over US companies’ executive compensation practices is growing, with one research group calling for boards to move away from the traditional method of peer group benchmarking – where companies evaluate pay packages at other comparable firms.

While some companies feel this benchmarking strategy will help them retain the best CEOs, a report from the Investor Responsibility Research Center (IRRC) Institute and PROXY Governance says it is in fact doing more harm than good.

The problem is that companies are skewing data by self-selecting larger than appropriate peers to measure compensation, resulting in soaring executive pay.

The report, called ‘Compensation Peer Groups at Companies with High Pay’, says CEOs should start being rewarded for their own accomplishments and expertise, rather than being paid what their peer groups are paying their head honchos.

Companies with high pay rates compensated their CEOs an average of 103 percent of the peer group median, despite being 25 percent smaller than their peers.

On the other hand, baseline companies gave their CEOs an average of 15 percent below their peer group median – a discount roughly in line with approximately 17 percent smaller average revenue, the study says.

‘This data indicates that some companies are ‘fixing the game’ by first choosing larger and better-performing companies to be in the peer group against which they measure their CEOs’ compensation,’ says Jon Lukomnik, program director of the IRRC Institute.

‘Then, incredibly, even the ‘fixed’ rules are ignored to grant compensation more than 100 percent above the self-selected peer group. By contrast, baseline company CEOs are paid less than the CEOs of their peer groups. Clearly, high CEO pay does not always go hand-in-hand with superior shareholder returns.’

Click here to download the full report.

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