Peer Pay BenchmarkingExecutive compensation and how todetermine it remains a hot issue. A recent survey by InstitutionalShareholder Services (ISS) finds executive pay is the topgovernance issue cited by institutional investors in both NorthAmerica and Europe. The issue ranks second after board independencein the Asia-Pacific region and developing markets. Meanwhile, acontroversial research paper by the University of Delaware's JohnL. Weinberg Center for Corporate Governance claims the standardboard practice of using groups of similar companies as a benchmarkto determine CEO compensation is unjustified and leads toescalating compensation levels.

Charles Elson, chair of the Weinberg Center and co-author of thestudy published in August, says the basic premise of usingpeer-group benchmarking is flawed. It's not just that selecting thecompanies to include in a peer group invites manipulation of theresults, Elson says. Nor is it that compensation is typically setat the 50th, 70th or 90th percentile found in the peer group, hesays, though “that is like Prairie Home Companion saying, 'All thechildren are above average.' It leads to a ratcheting up of all CEOsalaries.”

Rather, Elson argues, the notion that CEOs can easily move tothe top position at another company is not accurate. “There isreally no external market for CEOs,” he says. “The skills of achief executive are company-specific, involving experience, therelationships with other managers and executives and the culture ofthe company, and the odds of a CEO leaving a company overcompensation are slim to none.”

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