In the article published in SLATE on May 11, 2009 by Columbia professor Ray Fisman, titled “Comparison Shopping: The Real Reason CEO Compensation Got Out of Hand” provides an interesting view into the common practice of benchmarking compensation and its inherent flaws. Certainly benchmarking is and should be a tool in the toolkit that boards and consultants use to help set CEO pay, but Grahall sees it not as the only or even the primary tool in determining CEO pay. When peer group benchmarking is the primary tool used in the decision making process, you can be confident that the company is either over paying or underpaying its executives. And since peer group benchmarking only address “money”, it misses the very important aspects of the “mix” of rewards and the “messages” those rewards are sending. Grahall’s approach to designing executive compensation programs is a total rewards strategy approach, using money (the level of rewards), mix (the allocation of rewards among salary, inventive, benefits, etc) and messages (how the rewards drive desired business outcomes) to help a company structure an effective rewards programs that links rewards to its organizational and business strategy.
The answer to “How much is enough pay for the CEO?” can never be answered with peer benchmarking alone. For more information about the best way to determine CEO pay, check out the book, Effective Executive Compensation, written by Grahall’s own Michael Graham contact us.