Red Flags in Benchmarking Executive Pay - Moody's

Moody’s identifies red flags regarding executive compensation in a new analysis of the SEC’s expanded disclosure requirements. Of particular note are Moody’s comments on how companies can “game the system” when benchmarking executive pay against peers.

Moody’s lists the following red flags to look for when assessing peer groups:

• Too many firms listed (more than 15)
• Bias toward “peers” that are substantially larger and/or more profitable
• Multiple peer groups with unusually high CEO pay, particularly if not direct competitors
• Too many industries and geographic markets included
• Peers that do not compete with the issuer for executive talent
• Unexplained year-to-year peer group changes

These red flags can be a concern to investors because of the potential to “game” the pay-setting process.

For example, Moody’s says, a company may select a peer group composed of companies that are substantially larger than itself; that set a high percentile pay target (75th percentile or greater); or that operate in a more profitable sector. This practice can indicate an undisciplined pay-setting process and weak board oversight.

That said, some companies provided useful peer group disclosure in their 2008 proxy statements, including key factors about the peer group like revenues, asset size and number of employees, Moody’s says.

The full report Expanded Disclosure On U.S. Executive Compensation Offers New Clues For Creditors is available for purchase.

Comments

[quetzalcoatl:]

There should be no executive pay until the results are in and certified.

2008 Jul 12 07:22 PM

[punk_ash:]

If the execs are paid 1 million rather than 100 million, we will still get the same darn execs. Yeah right, these are execs are so qualified, most of these top guys are people who started distributing newspapers as kids and became very aggressive is selling, but never really knew how to create and add value. They are living high lives on the back of hard working americans.

2008 Jul 14 02:19 AM