News Briefs ///

Getting to the bottom of
executive mega-pay

Charles M. Elson (left), director of the John L. Weinberg Center for Corporate Governance, and Craig Ferrere, Edgar Woolard Fellow.

An over-reliance on peer group compensation benchmarking is central to the persistent issue of rising executive pay in the United States, according to research by Charles M. Elson, Edgar S. Woolard, Jr., director of UD’s John L. Weinberg Center for Corporate Governance, and Craig Ferrere, a 2011 UD graduate and the center’s first Edgar Woolard Fellow.

Their study, “Executive Superstars, Peer Groups and Over-Compensation—Cause, Effect and Solution,” has stirred conversations nationally, in both news and practitioner outlets, from The New York Times to Financial News. The research, which was funded by the Investor Responsibility Research Center Institute (IRRCi), recently was accepted for publication in the Journal of Corporate Law.

“We find that peer group comparisons are central to the CEO ‘mega-pay machine’ problem,” says Elson, who notes that even the best corporate boards will fail to address executive compensation concerns unless they tackle the structural bias created by external peer group benchmarking metrics.

“We find that boards should measure performance and determine compensation by focusing on internal metrics,” Elson notes. “For example, if customer satisfaction is deemed important to the company, then results of customer surveys should play into the compensation equation. Other internal performance metrics can include revenue growth, cash flow and other measures of return.”

Ferrere says that most companies see CEOs as transferable, and that to persuade them to stay, companies will raise compensation, but CEOs are specifically talented and not interchangeable, he argues.

According to Ferrere, peer group analysis was never intended to be central to senior management compensation. “Historically, it was designed after World War II to compare jobs such as accountants and civil engineers across companies,” he says. “In hindsight, it was an easy but misguided approach that eventually led to the application of peer grouping to CEOs and senior executives.”

The duo has presented their research from Delaware to California and will address the American Bar Association in 2013.