Do you use:
- Benchmark compensation data to set senior executive compensation?
- Consider the enterprise’s performance and shareholder return relative to comparable companies?
- Data on your Senior Executive’s compensation in past years and compensation data across the enterprise?
Recently published research by by Charles M. Elson and Craig K. Ferrere of the John L. Weinberg Center for Corporate Governance at the University of Delaware has highlighted doubts about the transferability of CEO skills between organisations and, in this context, the appropriateness of using market compensation data to drive compensation decisions. The paper, sponsored by The Investor Responsibility Research Centre (IRRC) argues that:
- “Theories of optimal market based contracting are misguided because they are based on the notion of vigorous, competitive markets for transferable executive talent;
- Even boards comprised of the fiduciaries faithful to shareholder interests will fail to reach an agreeable resolution to compensation when they rely on the flawed and unnecessary process of peer benchmarking;
- Systemically, a formulaic reliance on peer grouping will lead to spiraling executive compensation, even if peer groups are well constructed and comparable; and
- The solution is to avoid arbitrary application of peer group data to set executive compensation levels. Instead, compensation committees must develop internal pay standards based on the specific company, its competitive environment and its dynamics. Relevant considerations include an executive’s current and historic performance and internal pay equity. Some reference to peer groups may be warranted, but the compensation process must maintain the flexibility necessary to arrive at a reasonable approximation to what is absolutely necessary to retain and encourage talent. “ (IRRC 17 Oct 2012)
Efficienarta can help you develop a compensation strategy and standards to underpin your Board’s discussion of Executive compensation.