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MVC Associates International, May 21, 2007 press release


Internal Pay Equity Key to Fixing a Broken CEO Pay System: New Research Shows Excessive CEO Pay May Link to Performance Failure and Business Risk


                 -Compensation Consultants Partly to Blame-

    NEW YORK, May 21 /PRNewswire/ -- MVC Associates International today
revealed the highlights of a ground-breaking new research study of CEO
internal pay equity and current CEO pay analysis with potential major
implications for Boards, investors and regulators, including possible "red
flag" status from credit rating agencies. The new study exposes critical
flaws in CEO pay practices that potentially lead to poor Board
decision-making on CEO pay and misleading SEC compensation disclosures. The
Study also points to broader business risks and deep-seated corporate
governance issues.
    The research conducted by MVC Associates tested CEO to Named Executive
Officer (NEO) pay equity ratios against 2,000 companies within the Russell
3000, based on 2003 to 2005 compensation data. In sharp contrast to
historic norms, the study identified CEO to median NEO pay multiples by
company from the 3 to 27 times range -- with some CEO pay differentials to
individual NEOs as high as 50 times or greater. By examining corporate
performance data (Standard & Poors), debt ratings and corporate governance
ratings (The Corporate Library), the research was also able to identify a
cluster of over 800 companies (40%) considered high-pay-multiple outliers,
which raise serious concerns about Board decision-making on CEO pay,
governance practices, Director independence, and business risk.
    Mark Van Clieaf, managing director of MVC Associates, said, "The
genesis of this CEO and NEO internal pay equity compensation study comes
from the recurring requests we were getting from our Board clients. They
asked: what is a reasonable standard of fairness for CEO pay? In this
report, we set out to answer that question."
    Van Clieaf continued, "Fifteen years of international research from
1970 to 1985 on requisite organization design and 'Felt Fair Pay' with more
than one thousand managers of companies across several countries
underscores that a CEO should be paid about twice the amount paid to the
next management level -- the direct reports or NEOs. This internal Pay
Equity Multiplier (PEM) for CEOs to NEOs should be in the two times range."
    Moody's Investors Service reported(1) that in their view any CEO to NEO
pay equity multiple in excess of three times was a "red flag" among
numerous analysis input factors in their process for review of credit and
corporate governance risk. The research study conducted by MVC Associates
found over 3,400 cases in 2,000 companies in the Russell 3000 where the CEO
to NEO pay multiplier exceeded Moody's three times "red flag."
    Jeff Immelt, CEO of General Electric, recently stated his view that the
CEO role should be paid within a small range of the top twenty plus
executive team members, and that his own pay was within two to three times
that of his top executive team. Confirming the view of Immelt and some
other corporate leaders, our research study identified some 1,600 companies
in the Russell 3000 with CEO pay equity multiples less than four times,
with a median pay equity multiplier of 2.45 times and 75% of these
companies did not exceed the two to three times CEO to NEO pay
    Van Clieaf commented, "Boards are ultimately accountable to
shareholders for decisions on CEO pay in the companies over which they
exercise their fiduciary duty and business judgment; however the pay
consultants some directors have hired and relied upon must often share a
substantial part of the blame for the process failures resulting in pay
inequity and pay-for- performance disconnects so evident today. MVC
Associates' prior research confirms that the external market compensation
surveys on which Boards typically depend are often riddled with structural
and procedural flaws that have contributed to a CEO pay spiral and possible
materially misleading SEC disclosures for shareholders."
    Such flaws include failure to recognize the true level of CEO role
complexity and required innovation when benchmarking executive roles for
pay comparison purposes; especially since not all CEO jobs are created
equal and the need for truly comparable executive pay is not fixed by a
simple regression on company revenue which is today's compensation industry
standard. Moreover, compensation survey procedures and executive pay
benchmarking using proxy disclosures are often based on an inappropriate
choice of peer groups for comparison. Such pay benchmarking does not
reflect the true market for executive talent from which a board would
recruit a new CEO if it went outside the company. These currently accepted
pay analysis practices have contributed to the CEO pay spiral which this
study has empirically quantified.
    (1) June 2006 Special Comment
    MVC Associates recommends to Boards, investors, securities regulators
and members of the judiciary:
    (1) Examine internal pay equity multiplier (PEM) for CEO roles in
        relationship to the second and third layers of management below.  It
        may be possible to hide a CEO pay problem by increasing pay for the
        NEOs but that cannot be pushed down to the third tier of management
        without upsetting the entire pay structure and compensation costs of
        the company.
    (2) Be wary of the critical flaws typically found in market compensation
        surveys and pay benchmarking processes using proxy statements from
        many in the compensation consulting industry, and take steps to ensure
        that the executive job match, compensation calibration process and pay
        percentile analysis are legally defensible to shareholders and the
    (3) Consider adopting a Compensation Fairness Analysis and Opinion based
        on four fairness tests which MVC Associates outlines in its prior best
        practices research.
    MVC Associates counsels corporate leaders and concerned investors to
pressure regulators to adopt mandatory internal pay equity disclosure for
the top three levels of management, and a Compensation Fairness Analysis
and Opinion.
    The full research report by MVC Associates will be available for
purchase in the summer of 2007.
    About MVC Associates International
    MVC Associates, a private company, is an international consultancy in
organizational design, leadership and shareholder value. MVC's member
consultants advise Boards and management on organization structure audits
and re-design, lean business process, enterprise risk management and
leading non- financial indicators of future value creation. By combining
vertical examination of roles, accountabilities and decision authorities
with horizontal analysis of end-to-end business processes and bringing
expertise from a variety of disciplines, MVC Associates offers a
multi-dimension architecture of related services to its corporate
customers. More information about MVC Associates can be accessed at .

SOURCE MVC Associates International



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