5 Principles for Successful Executive Pay Benchmarking

5 Principles for Successful Executive Pay BenchmarkingZoom inDownload PDF

Commentators on executive pay have for years pointed to factors that drive up compensation levels. Some of these factors, such as paying more to take account of unprecedented challenges and global competition, raise no eyebrows. But others, namely peculiarities in the compensation system unrelated to the functioning of executives, come in for fair criticism.

Leading pundits and governance groups have taken aim at benchmarking as a primary cause. Their argument is that “competitive” benchmarks are artificially precise and thus flawed. More important, repeatedly targeting a specific percentile, often the median, frequently leads to unnecessary pay increases. These criticisms have triggered a backlash against using benchmarking data.

However, the culprit in pay increases is not so much benchmarking but over-reliance on an exact percentile as a standard for adjusting pay. Many companies and compensation committees toe the line of the median rather than risk not paying competitively and appropriately. In effect, they give benchmarking data too much weight. But benchmark figures can offer a valuable input to the process and a resource for more thoughtful decision making without being an absolute standard.

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This article by Greg Arnold originally appeared in the February 2015 issue of WorkSpan