The Shareholder ForumTM


"Say on Pay" Proposals

Forum Home Page

"Say on Pay" Home Page

Program Reference


In its announcement of the report addressed in the column below, the IRRC Institute presented a statement of its executive director Jon Lukomnic challenging governance doctrine that had established "peer" benchmarking as the primary basis for executive compensation:

"[The research] indicates that corporate boards need to de-emphasize peer grouping, and increase the emphasis on their company and executive accomplishments. Companies are better served when directors use discretion - both up and down - in setting compensation structures and levels. For investors, the study reveals a need to move away from formulaic peer group analyses in judging compensation packages, and hold directors accountable for their judgements. Shifting from the peer benchmarking process certainly isn't the total fix, but moving towards an internal metric approach has the potential to contribute to solving the compensation problems that plague many public corporations."

For the full IRRC Institute report and its press release, see


Source: New York Times, September 23, 2012 column


Fair Game

C.E.O.’s and the Pay-’Em-or-Lose ’Em Myth

CORPORATIONS are forever defending big executive paydays. If we don’t pay up, the argument goes, our sharpest minds will jump to our rivals.

Ramin Talaie/Bloomberg News

In 2003, furor erupted over the company peer group chosen to figure a $140 million payday for Richard Grasso of the N.Y.S.E.


200 Slices of Wealth


Times Topic: Gretchen Morgenson



Now, there are good reasons for rewarding top executives. The decisions they make are so crucial to their companies that the priority should be to hire competent people rather than scrimp on pay.

But a study released last week pretty much drives a stake through that old “pay ’em or lose ’em” line — what you might call the brain-drain defense. It also debunks the idea that companies must keep up with the Joneses by constantly comparing their executives’ compensation with that of similar companies.

This peer-group benchmark — how executive pay at one company stacks up against pay at another — is a big driver of ever-rising compensation. Boards say it helps them set pay based on what the market will bear.

Well, maybe not.

New research by Charles M. Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, and Craig K. Ferrere, one of its Edgar S. Woolard fellows, begins by attacking this conventional wisdom. Mr. Elson and Mr. Ferrere conclude, contrary to the prevailing line, that chief executives can’t readily transfer their skills from one company to another. In other words, the argument that C.E.O.’s will leave if they aren’t compensated well, perhaps even lavishly, is bogus. Using the peer-group benchmark only pushes pay up and up.

“It’s a false paradox,” Mr. Elson said in an interview last week. “The peer group is based on the theory of transferability of talent. But we found that C.E.O. skills are very firm-specific. C.E.O.’s don’t move very often, but when they do, they’re flops.”

Executive pay has come under scrutiny — and criticism — in recent years, in part because so many ordinary Americans are struggling in a difficult economy. Companies have pushed back, often pointing to the peer-group benchmark. But that benchmark has had a pronounced effect on pay levels across corporate America. As the Delaware study notes, one company’s showering of rewards on its executives affects executive pay at every one of its peers.

In annual proxy statements, compensation committees of corporate boards tell shareholders which companies they placed in their peer groups and why. Last year, for example, I.B.M. said it began by including all companies in the technology industry with annual revenue of more than $15 billion. But it also added companies in other industries with revenue of at least $40 billion and “a global complexity similar to I.B.M.,” the company said. The result was that 28 companies were in the group, including AT&T, Ford and Pfizer.

Peer groups have come under attack periodically, especially when they appear to inflate pay.

In 2003, a firestorm erupted over the peer group chosen by the board of the New York Stock Exchange to compute a $140 million payday for Richard A. Grasso, its former chairman. Even though the Big Board was then a nonprofit organization, the board’s peer group included highly profitable investment banks and huge financial institutions. Benchmarking against companies that are much larger and more complex has the effect of increasing pay, experts say.

But even when peer groups are compiled prudently, the Delaware study contends, they are deeply flawed measures. “Whether the excess compensation is awarded for merit or otherwise,” the authors wrote, “a talented individual who is paid on a scale deserving of their abilities should not, through the peer group mechanism, be allowed to bolster the pay of less able executives.”

Importantly, the study disputes the notion that executive pay today is a result of an efficient bidding process for finding and retaining a scarce and valuable commodity: managerial talent. “In essence, this process creates a model of a competitive market for executives where it otherwise does not exist,” the authors wrote. “Through the operation of a market, it is argued, wages are bid up to an executive’s outside opportunities.”

But there is little evidence, according to Mr. Elson and Mr. Ferrere, that a hot market exists for interchangeable chief executives. First, they note numerous academic studies indicating that C.E.O.’s selected from within a company perform better than outsiders, especially in the creation of long-term shareholder value.

“There is no conclusive empirical evidence that outside succession leads to more favorable corporate performance, or even that good performance at one company can accurately predict success at another,” the authors conclude. “In short, executive skills cannot pass the most basic test of generality: transferability.”

TO be sure, this flies in the face of the widely held view that skilled managers have become generalists and are therefore far more interchangeable than in previous years. Proponents of this thesis argue that top managers today can accumulate a broad knowledge of economics, finance and management science, giving them the ability to manage any type of company effectively. Technological advancements also give chief executives access to untold amounts of data about a particular company that in previous times would have taken years to amass and synthesize, this view holds.

But the data on actual C.E.O. moves raises questions about just how portable C.E.O. skills really are. The Delaware paper cites several studies indicating that relatively few chief executives land new top jobs elsewhere. One study, a 2011 analysis of roughly 1,800 C.E.O. successions from 1993 to 2005, found that less than 2 percent had been public-company chief executives before their new jobs.

“It appears that the threat to go elsewhere is muted for a sitting C.E.O.,” the authors concluded. “Particularly for the large firms comprising the S.& P. 500, C.E.O.’s are rarely traded in any market for their talents.”

Nevertheless, the notion persists that chief executives and their skills are transferable — and that they will walk if their pay doesn’t keep rising.

This, Mr. Elson and Mr. Ferrere argue, has given rise to a new type of captured corporate director. “Rather than being beholden to management and thus ineffective in negotiating pay because of a lack of arm’s-length bargaining, boards are now often seen as captive to the market,” the two wrote.

Because that market is largely based upon the questionable use of peer groups, the authors contend that those interested in changing executive pay practices should begin by junking these benchmarks. “Instead,” the authors said, “the independent and shareholder-conscious compensation committee must develop internally consistent standards of pay based on the individual nature of the organization concerned, its particular competitive environment and its internal dynamics.”

Directors may not like the extra work. Shareholders should insist on it.

“Everyone wants a formula and peer grouping is part of that,” said Jon Lukomnik, executive director at the Investor Responsibility Research Center Institute, which financed the Delaware study. “We need objective measures but we also need to understand their limitations.”

© 2012 The New York Times Company




This Forum program is open, free of charge, to anyone concerned with investor interests relating to shareholder advisory voting on executive compensation, referred to by activists as "Say on Pay." As stated in the posted Conditions of Participation, the Forum's purpose is to provide decision-makers with access to information and a free exchange of views on the issues presented in the program's Forum Summary. Each participant is expected to make independent use of information obtained through the Forum, subject to the privacy rights of other participants.  It is a Forum rule that participants will not be identified or quoted without their explicit permission.

The organization of this Forum program was supported by Sibson Consulting to address issues relevant to broad public interests in marketplace practices, rather than investor decisions relating to only a single company. The Forum may therefore invite program support of several companies that can provide both expertise and examples of performance leadership relating to the issues being addressed.

Inquiries about this Forum program and requests to be included in its distribution list may be addressed to

The information provided to Forum participants is intended for their private reference, and permission has not been granted for the republishing of any copyrighted material. The material presented on this web site is the responsibility of Gary Lutin, as chairman of the Shareholder Forum.