Executive Pay Equity

A recent headline from WorldatWork indicates the gap between CEO and CFO pay is growing farther apart.   The study conducted by BDO USA, LLP indicates that CFOs average 40% of CEO pay at 600 public companies included in the study.  One reason offered for the increased disparity is due to CEO pay being more commonly tied to the increase in the company’s equity, which for most public companies, increased substantially in 2010 and 2011.

While CEO’s have historically been paid at levels higher than the rest of the executive team, this recent trend of an increased gap could lead to problems.  Shareholders may assume that the change in the CEO – CFO pay comparison could be a reflection of how the Compensation Committee values the relative roles of risk-taker vs. risk-controller.   Let’s hope not.  That led to some serious problems in the past.  It is more likely that the bigger recent gap is due to the 2010 and 2011 run up in stock prices and the CEO’s larger percentage of compensation tied to stock price gains.  Should the mix be so different for the two positions?  A return to a more equitable internal pay structure will help avoid potential perceptions among shareholders that CFOs are not valued as much as they have been in the past.

With slowly improving economic indicators, organizations are reviewing current compensation practices.   In addition to the scrutiny on executive compensation as a Pay Equityresult of Dodd-Frank, this renewed focus on executive pay will require organizations to focus on their philosophy and implement equitable compensation plans.  Compensation Committees may want to look at how relative compensation has changed over time and consider ways of optimizing compensation mix to stabilize the fluctuation in the comparisons.

In our Firm’s work with client executive teams, we have historically measured the internal pay equity of senior executives measured as a percentage of the CEO’s pay.   We have significant, historically viable data showing the relative pay for all executives on the senior team as related to that of the CEO.   Two critically important objectives of any company’s compensation philosophy should be to target external competitiveness and be internally equitable.

If you would like a review of your company’s current compensation practices measured against market, industry and custom peer groups, please give us a call (919-644-6962) or visit us at http://matthewsyoung.com.

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