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By Che Odom
March 22 — The new pay ratio rule may help companies develop more appropriate compensation for their chief executives than the current practice of using peer group benchmarks, law professor Charles Elson said March 22.
“Maybe we need to think about pay within the organization when setting executive pay,” Charles Elson, director of the University of Delaware's John L. Weinberg Center for Corporate Governance, told attendees at the Council of Institutional Investors' spring conference in Washington.
The Securities and Exchange Commission adopted a rule in August 2015 that requires public companies to disclose the ratio of the compensation of their chief executive officer to the median compensation of their employees .
Companies will be required to provide disclosure of their pay ratios for their first fiscal year beginning on or after Jan. 1, 2017.
Many company representatives and corporate attorneys have criticized the rule as being meaningless, designed merely to embarrass executives .
Elson, however, said the pay ratio may get at what’s wrong with the current approach of using peer groups to explain CEO pay. Instead of setting a compensation level that makes most sense for the organization, companies establish a peer group, then make sure their CEOs are above the average, and this leads to salary inflation, he said.
Elson, who has written extensively on corporate governance matters, said that CEOs, with few exceptions, do not move laterally to other companies because their skill sets are so specific to the individual companies they serve.
Elson, who also sits on the boards of Bob Evans Farms Inc. and HealthSouth Corp., and other directors said at the conference that say-on-pay requirements have forced companies to talk with investors about compensation.
The SEC's rule requires public corporations to hold shareholder votes on the compensation of named executives at least once every three years. The first required votes occurred in 2011 .
John Rogers Jr., a director at Exelon Corp. and McDonald’s Corp., said boards are more independent and critical of management today after the reforms of the 2002 Sarbanes-Oxley Act and 2010 Dodd-Frank Act, which tasked the SEC with writing the say-on-pay and pay ratio rules.
“I think say-on-pay has made a difference in how boards make decisions,” Rogers said.
Although say-on-pay has forced engagement among management, boards and investors on pay issues, it hasn’t dampened high CEO compensation, Barbara Krumsiek, director at Pepco Holdings Inc., said.
“Say-on-pay definitely has made compensation committees sit up straight and be diligent, and it is a very important light to shine on compensation,” she said.
A recent study by Semler Brossy Consulting Group found that 91 percent of shareholders voted to approve executive compensation plans last year . Sixty-one companies failed say-on-pay in 2015, the highest number of negative votes in any year since they were first required to be held in 2011, the study found.
Deborah C. Wright, a Time Warner Inc. director, agreed that little has changed when it comes to CEO pay, though companies and boards spend a lot of time and money on compensation consultants attempting to develop metrics and peer groups to set executive pay.
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