Video Friday: Compensation Debate

On Friday, January 18thThe Conference Board Governance Center hosted a debate on Executive Compensation and the Utility of Peer Groups in collaboration with the University of Delaware’s John L. Weinberg Center for Corporate Governance. Latham & Watkins provided the venue for the program.

The debate was between Prof. Charles Elson and Craig Ferrer of University of Delaware’s John L. Weinberg Center for Corporate Governance and Ira Kay of Pay Governance LLC. The debate was moderated by Jim Barrall of Latham & Watkins.

On Friday, January 18thThe Conference Board Governance Center hosted a debate on Executive Compensation and the Utility of Peer Groups in collaboration with the University of Delaware’s John L. Weinberg Center for Corporate Governance. Latham & Watkins provided the venue for the program.

The debate was between Prof. Charles Elson and Craig Ferrer of University of Delaware’s John L. Weinberg Center for Corporate Governance and Ira Kay of Pay Governance LLC. The debate was moderated by Jim Barrall of Latham & Watkins.

http://youtu.be/3Xd_cJWQiA4

Published as Executive Compensation and the Utility of Peer Groups (Video), 1/26/2012, on the Conference Board’s Governance Center Blog and reprinted here courtesy of Marcel Bucsescu, Manager, The Conference Board Governance Center.

The presentation was summarized on the Conference Board’s blog at Executive Compensation and the Utility of Peer Groups: Key Take Aways as follows:

  • Peer group benchmarking of CEO pay is not justified by market forces based on  data which shows that over many years relatively few CEOs quit to take other CEO jobs
  • There is little CEO mobility because CEO skills generally are not transferable
  • Benchmarking CEO pay ratchets it up and has been the prime cause of its inexorable rise since World War II (punctuated only occaisionally when stock market bubbles burst)
  • Companies and investors would be better served by benchmarking CEO pay internally to that of other officers and
  • Internal executive pay benchmarking is attracting support from investors and will become more influential.

In response, Ira argued that:

  • Charles and Craig were misinterpreting the data on CEO turnover
  • CEOs do not move much between companies because companies have done a good job of handcuffing them with unvested equity and pension benefits
  • The movement of CEO pay should not be evaluated based on pay opportunities (as Charles and Craig have done) but rather on realizable pay
  • Benchmarking CEO pay at the median of the peer group is appropriate and good
  • For most companies peer group benchmarks are only one factor in, and not the main determinant of, CEO pay and
  • Investors support evaluating CEO pay against that of market peers, and investors have endorsed the use of peer groups and supported company executive pay plans and policies as indicated by the 98%  pass rate for say-on-pay votes in 2011 and 2012.

My takeaway: Elson and Ferrer may be correct that companies shouldn’t base CEO pay on peer groups. CEO pay should be designed to reinforce the company’s internal pay structure. Nonetheless, Ira Key is correct that companies will still need to look at peer groups because when evaluating pay, shareowners will still look first to TSR and peer group comparisons. Ideally, build pay so the CEO accumulates and vests over a long period of time. This is the best debate I’ve seen on pay for a long time.

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