|  | | 2006 News and Press Releases | | |
HEADLINE NEWS:
Peer Pressure: Inflating Executive Pay
Staff Writer - New York Times
Securities Mosaic. November 26, 2006
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EXCERPT: When shareholders question lush pay, they are invariably met with a laundry list of reasons that businesses use to justify such packages. Among that data, no item is more crucial than the ''peer group,'' a collection of companies that corporations measure themselves against when calculating compensation. But according to a handful of pay experts who are privy to the design of pay practices at the nation's largest corporations, many of these peer groups are populated with companies that are anything but comparable. They also say corporate managers themselves -- who have an interest in higher pay -- are selecting which companies make it into a peer group. And because these companies are often inappropriate for comparison purposes, their use has helped inflate executive pay in recent years. ''The peer group is the bedrock of the compensation philosophy at a company,'' said James F. Reda, an independent compensation consultant in New York. ''But a lot of people do it by the seat of their pants, and that is part of the reason why executive pay has really skyrocketed.'' The use of peer groups to calculate executive pay has become ubiquitous in recent years. This is partly in response to the Securities and Exchange Commission's requirement that companies compare their stock performance with a peer group in tables in the section of their proxy filings devoted to shareholder returns. Theoretically, these tables allow investors to compare their company's performance against objective benchmarks. But as is true with much about executive pay, details about exactly how peer groups are compiled have been kept under wraps. The worry among investors, of course, is that executives, consultants and directors simply cherry-pick peer-group members, thereby pumping up pay packages. Current disclosure rules require neither the identification of companies in a compensation-related peer group nor the rationale behind their selection. Usually, the most a shareholder learns about companies in a compensation peer group is that they are in the same industry or of a similar size. This ambiguity will change when new Securities and Exchange Commission disclosure rules go into effect on Dec. 15. The rules will require a corporation to reveal which companies it uses in its peer group and to provide an extensive description of its compensation philosophy. Under the new rules, company officials will also have to certify the accuracy of their pay disclosures. As a result, peer groups are likely to attract increased scrutiny, said Mark Van Clieaf, managing director of MVC Associates International, a consulting firm that specializes in organization design and pay-for-performance standards. ''Is benchmarking pay across companies truly comparing apples to apples?'' Mr. Van Clieaf asked. ''Failure to have a legally defensible process'' can lead to ''materially false'' disclosures, he said. |
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