How to determine executive compensation remains a hot issue, with a recent Institutional Shareholder Services survey showing executive pay is the top governance issue for institutional investors. Meanwhile, a research paper from the University of Delaware's John L. Weinberg Center for Corporate Governance has focused debate on the standard practice of benchmarking CEO compensation by looking at a group of similar companies, which it argues leads to escalating pay levels.
Charles Elson, chair of the Weinberg Center and co-author of the study, says selecting the companies to include in a peer group invites manipulation of the results, while the fact that compensation is typically set at the 50th, 70th or 90th percentile level found in the peer group "leads to a ratcheting up of all CEO salaries."
Most importantly, the basic premise—the notion CEOs can easily move from one company to a competitor—is not accurate, Elson argues. "There is really no external market for CEOs. The skills of a chief executive are company-specific, involving experience, the relationships with other managers and executives and the culture of the company, and the odds of a CEO leaving a company over compensation are slim to none."
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