A recent Weinberg Center and IRRCi paper, “Executive Superstars, Peer Groups and Overcompensation: Cause, Effect and Solution” (forthcoming in the Journal of Corporation Law, Spring 2013), has generated a lot of attention. Here is a round-up of recent coverage.
- Gretchen Morgenson at the New York Times, “Fair Game: C.E.O.’s and the Pay-’Em-or-Lose-’Em Myth”
- David Futrelle at Time magazine, “Executive Pay: Is “I’ll Have What He’s Having” Really the Best Approach?”
- Martha C. White at NBC News, “Lavish CEO pay doesn’t work as intended: study”
- William Alden at the New York Times DealBook, Morning Agenda
- Stephen Bainbridge on his blog ProfessorBainbridge.com, “Elson on the pernicious role of the peer group methodology in setting executive compensation”
- Brok Romanek at TheCorporateCounsel.net, “Study: Peer Group Benchmarking Falsely Used Because Talent Isn’t Transferable”
- Directors Daily Briefing, Directorship, “New study addresses the pay-‘em-orlose’em myth regarding CEOs”
- Catherine Dunn at Corporate Counsel, “Time to Abolish Peer Grouping in Determining Executive Pay?”
- Joe Mont at Compliance Week, “Peer Pressure: Is Benchmarking to Blame for Runaway CEO Pay?”
- Hamilton Nolan on Gawker, “The Way CEOs Get Paid Is a Crock”
- Dan Ariely at Wall Street Oasis, “Bogus Bonuses and C.E.O. Salaries”
- Mike Foster at Financial News, “Peer pressure feeds pay spiral”
- Jamie Smith Hopkins at the Baltimore Sun, “CEO Pay Rises at Most Local Public Companies”
- Hunter Riley at the New Mexico Business Weekly, “New study questions CEO pay practices”
- Marc Hogan at Agenda Week, “Study Questions Retention Power of CEO Pay; Investors Want Board Members to Reach Out”
- Kristin Gribben at Agenda Week, “Is Benchmarking Gradually Falling Out of Favor?”
The paper can be downloaded without charge from SSRN here.
UD corporate governance professor, fellow issue study on executive pay
12:35 p.m., Sept. 24, 2012–An over-reliance on peer group compensation benchmarking is central to the persistent issue of rising executive pay in the United States, new research in a study co-authored by a University of Delaware professor and a corporate governance fellow, finds.
While other research examines flawed peer group methodology, this new study makes it clear that peer grouping with minimal board discretion is a seriously flawed methodology even when the peer groups are fairly constructed. The study also is the first to document that peer group benchmarking – now so widely utilized that it is enshrined in federal regulations – has accidentally become the de facto standard even though it never was designed to determine CEO compensation.
The report, “Executive Superstars, Peer Groups and Over-Compensation – Cause, Effect and Solution,” finds that moving to a compensation system that instead focuses on internal, company-specific metrics and benchmarks will result in a more reasoned executive compensation approach, improved board oversight, and a healthier corporation.Authors of the study are Charles M. Elson, Edgar S. Woolard, Jr., Chair and director of the John L. Weinberg Center for Corporate Governance at UD, and Craig K. Ferrere, the Edgar S. Woolard Fellow in Corporate Governance at the Weinberg Center, and funded by the Investor Responsibility Research Center Institute (IRRCi).
The study was the subject of a story in the Sept. 22 issue of The New York Times. The full study is available at the IRRCi website.
“We find that peer group comparisons are central to the CEO ‘mega pay machine’ problem,” said Elson. “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. 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.”
“This report is unique in that it takes a pragmatic approach to executive compensation theory, to us an understanding of executive pay should begin by looking at the peer group process,” said Ferrere. “It’s also important to note that the use of 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. In hindsight, it was an easy but misguided approach that eventually led to the application of peer grouping to CEOs and senior executives.”
“These findings have profound implications for CEOs, directors, and investors,” said Jon Lukomnik, IRRCi executive director. “It indicates that corporate boards need to de-emphasize peer grouping, and increase the emphasis on their company and executive accomplishments. Companies are better served when directors use discretion – both up and down – in setting compensation structures and levels. For investors, the study reveals a need to move away from formulaic peer group analyses in judging compensation packages, and hold directors accountable for their judgements. Shifting from the peer benchmarking process certainly isn’t the total fix, but moving towards an internal metric approach has the potential to contribute to solving the compensation problems that plague many public corporations.”
The research paper argues that:
- Theories of optimal market-based contracting are misguided because they are based on the notion of vigorous, competitive markets for transferable executive talent;
- Even boards comprised of the fiduciaries faithful to shareholder interests will fail to reach an agreeable resolution to compensation when they rely on the flawed and unnecessary process of peer benchmarking;
- Systemically, a formulaic reliance on peer grouping will lead to spiraling executive compensation, even if peer groups are well constructed and comparable; and
- The solution is to avoid arbitrary application of peer group data to set executive compensation levels. Instead, compensation committees must develop internal pay standards based on the specific company, its competitive environment and its dynamics. Relevant considerations include an executive’s current and historic performance and internal pay equity. Some reference to peer groups may be warranted, but the compensation process must maintain the flexibility necessary to arrive at a reasonable approximation to what is absolutely necessary to retain and encourage talent.
This research adds to the body of executive compensation research funded by IRRCi.
Photo by Evan Krape
On September 12, 2012, Professor Charles M. Elson, Edgar S. Woolard, Jr., Chair in Corporate Governance and Director of the John L. Weinberg Center for Corporate Governance at the Lerner College of Business and Economics, University of Delaware, participated on a panel on “What Directors and Senior Executives Need to Know about Performance-Aligned Compensation” at The Conference Board’s 2012 Executive Compensation Conference in New York. The panel was moderated by Jack Zwingli, Leader, Information Services and Research, Farient Advisors LLC. The other panelist was Anne Sheehan, Director, Corporate Governance, California State Teachers’ Retirement System. Professor Elson spoke extensively about peer groups, CEO transferability and the compensation issue – making specific reference to the Weinberg Center’s new research paper “Executive Superstars, Peer Groups and Over-Compensation – Cause, Effect and Solution,” written by Craig Ferrere, Edgar S. Woolard, Jr., Fellow in Corporate Governance, and Professor Elson.
Professor Charles M. Elson, Edgar S. Woolard, Jr., Chair in Corporate Governance and Director of the John L. Weinberg Center for Corporate Governance at the Lerner College of Business and Economics, University of Delaware, participated on a panel on “Corporate Social Responsibility” at the PLI’s Tenth Annual Directors’ Institute on September 12, 2012 in New York. The panel was moderated by Jeffrey D. Karpf from Cleary Gottlieb Steen & Hamilton LLP. The other panelists included Meredith B. Cross, Head of Global Research, Institutional Shareholder Services; Donna Dabney, Executive Director, Governance Center, The Conference Board; and Timothy Smith, Senior Vice President, Director of ESG Shareholder Engagement, Walden Asset Management, a division of Boston Trust & Investment Management. The panel discussed the new expectations facing boards of directors in the arena of social responsibility.
Ann C. Mulé, the Associate Director of the Weinberg Center for Corporate Governance, presented to the FWA Directorship and Corporate Governance Committee in NYC on September 11. Ms. Mulé spoke about some of the important issues facing directors of US public companies today. She focused on three areas: 1) The rise in the voice and power of the large institutional shareholder that has led to increasing director/company engagement with those shareholders; 2) The increasing globalization of corporate governance practices and why it is important for US directors to understand non-US practices; and 3) Board composition, culture and what is important for a high performance board. Milica Brogan, the executive director of the new Ira M. Millstein Center for Global Markets and Corporate Ownership at the Columbia Law School joined Ms. Mulé on the panel and spoke about one of the most significant corporate governance issues faced in the US today – how boards, management, shareholders and other constituencies need to focus on rebuilding trust in companies and the market. The session was hosted by Deloitte & Touche LLP which was represented by Nicole Sandford, Partner, National Governance Services Practice Leader.
The John L. Weinberg Center for Corporate Governance will present a panel discussion on “Director-Shareholder Engagement: Limits and Possibilities” on Thursday, Oct. 11 from 9:30 – 11:30 am. The panel will be moderated by Professor Charles M. Elson, Director of the Weinberg Center and the Edgar S. Woolard, Jr., chair of Corporate Governance.
Oct. 11: Weinberg Center panel
Corporate governance experts to discuss board, shareholder engagement
10:34 a.m., Sept. 7, 2012–The University of Delaware’s John L. Weinberg Center for Corporate Governance will present a panel discussion titled “Director-Shareholder Engagement: Limits and Possibilities” from 9:30-11:30 a.m., Thursday, Oct. 11, in the Gore Recital Hall of the Roselle Center for the Arts.
Director-shareholder engagement is a topic that has been increasingly receiving attention in the U.S., according to Charles M. Elson, Edgar S. Woolard, Jr., Chair of Corporate Governance and director of the center, who will moderate the panel.
Many governance organizations and experts have been discussing the topic in an attempt to highlight the issues and challenges that have been expressed by the various constituencies including the directors, institutional shareholders, activist shareholders, corporate management, regulators and lawyers.
While the constituencies do not always agree on the potential solutions, Elson said, many agree that the time is ripe for a continuing and fruitful dialogue.
The panelists include:
Donna Anderson, vice president and corporate governance specialist, T. Rowe Price;
Glenn Booraem, principal at Vanguard and controller, Vanguard Funds;
Peter Gleason, managing director and CFO, National Association of Corporate Directors;
Deborah Gilshan, corporate governance counsel, Railpen Investments;
Jeremy Goldstein, partner, executive compensation and benefits, Wachtell, Lipton, Rosen and Katz;
Jon Hanson, founder and chairman, The Hampshire Companies;
Catherine Jackson, corporate governance adviser, PGGM Investments;
Floyd Norris, journalist, The New York Times;
Henry Ridgely, justice, Supreme Court of Delaware;
Sarah Teslik, senior vice president, policy and governance, Apache Corp.; and
Marc Rome, vice president for corporate governance, Chesapeake Energy Corp.
Because space is limited, anyone who plans to attend should RSVP to Louisa Cresson at email@example.com no later than Wednesday, Oct. 3.
Photo by Ambre Alexander
On August 4, 2012, at the American Bar Association Annual Meeting, the Corporate Governance Committee presented the “Dual Class Stock: Value Enhancer or Corporate Governance Killer?” panel moderated by Professor Charles M. Elson, Director, John L. Weinberg Center for Corporate Governance, University of Delaware, along with panelists The Honorable Myron T. Steele, Chief Justice, Delaware Supreme Court; Frederick H. Alexander, Partner, Morris, Nichols, Arsht & Tunnell LLP; Stephen L. Brown, Director & Senior Counsel, TIAA-CREF; Christianna Wood, Former Chair, International Corporate Governance Network; Director H&R Block; Spencer G. Smul, Sr. Vice President, Deputy General Counsel & Secretary, The Estée Lauder Companies Inc.; and Janice Hester-Amey, Portfolio Manager, CalSTRS.
Dual class stock is a way of financing a business with two different classes of stock, where one class has significant voting control over the company with a smaller economic interest than their voting shares would typically represent. Traditionally, one share, one vote; under the dual class structure, one share may equal ten votes or twenty votes, depending on the structure.
The Weinberg Center recently hosted a panel discussion on dual class stock on April 12, 2012 titled “Dual Class Stock: Cost, Benefits and Future under Delaware Law.”
On May 22, 2012, the American Chamber of Commerce in the Czech Republic hosted Professor Charles Elson. He was a guest of the U.S. Ambassador Norman L. Eisen in Prague. He spoke on “The Past, Present and Future of Corporate Governance” and discussed the following topics: Have the Sarbanes-Oxley regulations decreased fraud or only increased paperwork?; Has the Dodd-Frank Reform Act made Wall Street more accountable?; Should executive compensation be regulated?; Does America’s regulatory focus on shareholder value work better than a policy based on stakeholder value?
In addition, he spoke to a group of Czech business and finance leaders at a luncheon at the Ambassador’s residence. His topic was corporate governance and its relation to effective business ethics.