The external benchmarking of executive compensation has contributed significantly
to the problem of high and rising pay in the United States. It is increasingly apparent that
the pay awarded to chief executives is becoming profoundly detached from not just the pay
of the average worker, but also from the companies they run. Offsetting the external focus,
which is so heavily relied upon today, with internal metrics and internal benchmarking may
help to curb the persistent escalation. We hope that if directors are no longer constrained
by notions of “competitive” pay, which are driven by the false belief that CEOs are
interchangeable, they may have the space to rationalize the upward spiraling pay ratchet
and deliver what is more shareholder acceptable compensation. This proposal may well
result in more reasoned executive compensation schemes, more effective board oversight,
and, most importantly, a healthier, more competitive corporation.
A hard and honest focus on the company itself and the accomplishments of the
executive in question by the board, rather than blithely looking externally to other
organizations, will best serve the company’s and the shareholder’s interests. Through this
careful focus, any potential difficulties and costs can be mitigated. Likewise, regulators and
the courts must recognize the dangers inherent in over-‐reliance on the flawed peer process
by boards and adjust their approaches to the pay issue accordingly. Deemphasizing the
peer group process in setting pay may not prove the comprehensive cure to the
overcompensation problem, but the costs of pursuing this approach are minimal and it is a
good beginning.