Questionable Use of Peers Continues to Inflate Pay

New research shows that companies most frequently included in peer comparison groups to determine executive pay are themselves very high paying companies. This should surprise no one, given the current level of cynicism, but it is a stark reminder of how that cynicism has been developed. Mercedes Erickson at Audit Analytics recently did an analysis of Peer Benchmarking Trends in Executive Compensation. She looked at which companies most often cited by Russell 3000 companies and pulled the top ten (including ties, so 13 companies were listed.) They range from 3M which appears in 57 separate peer groups, to Cisco, which shows up in 44. We then took those companies and looked more closely at their compensation. Median of all S&P 500 companies TDC $11.3 million. Median pay at the companies for these 13 companies was $14.5 million. Four of the top five companies that appeared most frequently in peer groups had CEOs with total compensation of over $20 million.

We also looked at salary, which while a smaller component of CEO pay packages is a critical one. It is the feature most likely to be ratcheted up by comparisons, and because everything from bonus to severance is typically driven as a multiple of salary, a raise in salary has an outsize effect on pay. The median of salary of S&P 500 companies is $1,081,000. The median salary of the 13 companies cited most often over $1.2 million. The average of the top 5 cited most frequently was $1.5 million.

It should also be noted that the companies Erickson used in her analysis were Russell 3000, so a considerably larger pool. The median CEO salary for Russell 3000 companies is likely considerably less than $1 million, but I do not have access to that data.

Inappropriate use of peers has been a primary inflator of executive compensation. The IRRC Institute funded study by Charles Elson and Craig Ferrere was aptly titled:  “Peer Group Benchmarking Inherently Flawed And Inflationary.”

Who wouldn’t like to have their pay established in comparison to with those paid more than them? It happens in other industries as well. Pay for university executives has climbed rapidly over the past few years as college presidents do similar peer comparisons. Students, who feel the pressure of rising tuition, ask why the president of their college should be paid more than the president of the United States. But there’s little they can do about it.

Shareholders, however, cast votes on pay.

If executive pay is ever to rebalance to more reasonable levels that trajectory will need to be reversed. Those companies that pay above peers not only are individually problematic, but are drivers of moving the peer group median pay level higher, as they will disproportionately affect median pay the following year.

Shareholders must vote against advisory votes at such companies.

Our upcoming report on Overpaid CEOs will expand the number of pension funds whose votes are disclosed.