Using Peer Groups to Set CEO Compensation? Keep Good Company

By Michelle Malay Carter on February 27, 2008 

pay.jpgMany organizations set CEO compensation by?using industry peer groups.? With no differentiation of CEO roles being made by work level, this is a huge problem.

Mark Van Clieaf, an industry colleague of mine, is a recognized expert in applying a level of work approach to organization design, executive succession, and executive compensation.

Matching?CEO Pay?to Work Level?– Was Mozilo’s Pay Fair?
His organization, MVC Associates, was asked by a group of pension fund managers to analyze the compensation of?Angelo R. Mozilo, Chairman and Chief Executive Officer of Countrywide Financial Corporation, from a level of work standpoint, and then review the level of work complexity represented by the peer group used to calibrate Mozilo’s pay package.

Remember, titles are deceiving.? Not all CEO roles are equally complex.? The larger and more complex an organization, the higher the CEO role is in terms of work levels.? Higher work levels merit higher pay using felt fair pay differentials.

Keeping Good Company Pays
Van Clieaf’s findings were that Countrywide was not in the the same league as the five companies used in Mozilo’s pay benchmarking analysis.? Although the peer group companies were in the same broad financial services industry, five peer group companies were found to have a CEO role level at least one work level higher than that of the CEO role at Countrywide.

Skewed Results
The net result of this skewed peer group selection was that?the median for CEO pay of the peer group was erroneously inflated by some 50%.

This problem of executive roles with the same title but different levels of work complexity is a fundamental problem
in the compensation world today.

According to Van Clieaf, none of the major compensation surveys today differentiate between say a CEO or CFO role at work Levels 4 versus 5 versus 6, and thus, all the executive compensation data today at work level 4 and above is distorted and not reliable.

A Work Levels Solution
Levels of work solves this compensation analysis problem by providing a framework and model for work level job leveling and compensation calibration that can lead to more equitable executive compensation decision making if properly applied.

I’m OK.? You’re OK.? Let’s fix the system.

Ultimately, we as participants in the global economy are paying for this misinformed practice.? What shall we do about it??

Filed Under Accountability, Executive Leadership, Felt Fair Compensation, Requisite Organization, Work Levels

Comments

2 Responses to “Using Peer Groups to Set CEO Compensation? Keep Good Company”

  1. Forrest Christian on March 4th, 2008 1:07 pm

    Mark has a wonderful set of articles regarding this issue on his website that are geared for the Director audience, so very readable. He believes that Boards may be putting themselves at risk for lawsuits by not looking at this issue, since it shows lack of Due Diligence on their part.

    So perhaps what we should be doing is suing the boardmembers directly, an option that the Disney decision may have made available.

  2. Michelle Malay Carter on March 5th, 2008 1:04 pm

    Forrest,

    Yes, I’ve read these. They are good. Thanks for the pointer.

    Regards,

    Michelle