The October 4 Washington Post article, “Cozy relationships and ‘peer benchmarking’ send CEOs’ pay soaring,” used stale, five-year old data to support his assertion that “at the vast majority of large U.S. companies, boards aim to pay their executives at levels equal to or above the median for executives at similar companies.”
- According to Equilar, Inc.’s 2011 S&P 1500 Peer Group Report, based on 2010 compensation data, “companies in the S&P 500 typically benchmark against companies with smaller revenues” with the median S&P 500 company ranked slightly larger than the median and average size company in its peer group.
- In addition, Equilar reports that the median percentage of peer companies that fell into the same industry as the benchmarking company was 85.7 percent. By definition, 50 percent of peers in an industry will be above the median (whether measuring by revenue, market capitalization or assets), and thus it stands to reason that many companies would be using peers that are above the median. Therefore, the Center believes it is important that companies consider size differences in peer group companies, since size and executive compensation have a close correlation.
- A 2011 ISS Corporate Services Report, “Executive Pay Through a Peer Benchmarking Lens,” examined peer group data between 2007 and 2010. It likewise concluded that “34 percent of studied companies set their pay relatively in line with performance” while 52 percent set pay in line with or below performance.
The article referenced data from two academic studies that reviewed peer benchmarking in 2007 proxies, the first year that the SEC’s rules required that companies disclose peer groups. The Equilar and ISS data is much more up-to-date and reflects the shift that has occurred in peer group practices since 2006.
Finally, the article did not discuss the different ways in which companies use peer data. Some boards benchmark total compensation rigidly to a peer group, but many use such benchmarking information as a “market check” and use their judgment to determine the appropriate total compensation and how it is allocated among the different elements.
Peer group benchmarking is an essential element of a company’s pay for performance story. Companies typically explain the rationale in the peer group selection in a proxy statement and a peer group reflects a complex variety of factors: business strategy, various business units, competition for talent, and simply business competitors. Contrary to the article’s assertion, the data shows that, in general, large companies are paying much more careful attention to peer group selection and use.