‘High Pay’ Firms Stack the Decks on Comp. Peer Groups

June 24, 2010 (PLANSPONSOR.com) – A new study finds a group of “high pay” S&P 500 companies select peer group members larger than those appropriate as peers for compensation benchmarking purposes. 

The Investor Responsibility Research Center (IRRC) and Proxy Governance Inc. (PGI) asserted that board of directors of the “high pay” companies ignore the compensation practices of their peer group sample as they compensate chief executive officers (CEO) an average of 103% above the median of the peer group they’ve selected. By contrast, the baseline, or non-high pay, companies paid CEOs an average of 15% lower than the median of benchmarking peers. 

The study defined approximately 15% of the S&P 500 companies as “high pay” due to a combination of pay and performance factors, including average three-year CEO compensation, total shareowner return, return on equity, revenues/expenses, and operating cash flow/equity. A sliding scale made it more difficult for a company to be termed high pay if its performance was at or above its peer group. 

“The new compensation disclosure requirements by the U.S. Securities and Exchange Commission have, for the first time ever, made it possible to evaluate structures and processes used by boards of directors to develop compensation packages.  This analysis offers a new framework for better understanding what’s behind high CEO compensation,” said Michael Ryan, President and Chief Operating Officer of PGI.  “We hope the study is a useful tool for investors and policymakers at a time when executive compensation is at the forefront of the financial reform debate,” Ryan added.

According to a news release, the key findings are:

  • While all companies in the study tended to select larger compensation peers, the differential was more dramatic for companies with high pay.  Measured by market capitalization, companies with high pay were an average of 45% smaller than self-selected peers versus an average of 5% smaller among baseline companies.   Measured by revenue, companies with high pay were an average of 25% smaller than self-selected peers, while baseline companies averaged only 17% smaller. 
  • Unlike baseline companies, companies with high pay tended to select higher-performing companies as compensation peers.  On average, companies with high pay performed 7.7% worse than self-selected peers, based on the study’s aggregate scoring metric. By contrast, baseline companies performed an average of 3% better than their self-selected peers. 
  • Companies with high pay were also more likely (21%) than baseline companies (17%) to select other companies with high pay as compensation peers. Conversely, however, the average company with high pay appeared in fewer S&P 500 compensation peer groups, at 8.5, than the average baseline company, at 10.3. 
  • Companies with high pay also structured their larger CEO pay packages with a disproportionately richer mix of equity awards (69% of total pay) than either their self-selected peers (62%) or baseline companies (61%). Full value equity awards at companies with high pay constituted 41.3% of total pay, versus 35.2% among self-selected peers and at baseline companies.  
  • Nearly 65% of companies with high pay had a CEO who was also chairman, slightly higher than the 60% rate among baseline companies. Baseline companies, however, were moderately more likely to have a classified board (29% versus 24%) or have had a shareholder pay proposal on the ballot in the prior three years (29% versus 24%).