This article describes new academic research examining a key factor that influences executive compensation at many firms. The studies analyze how companies select their "peers" when evaluating what they should pay top executives. Typically, firms compare their compensation packages to peer companies. However, a key question remains: "Who are the relevant peers?" The new academic research shows that firms often select larger rivals, who have higher compensation, when putting together these peer comparison analyses. Therefore, firms find it easier to justify high compensation packages for top executives.
Immediately, I began to think about how effective boards and corporate governance practices should be able to monitor such analyses and force more reasonable comparisons. Weak boards and weak governance would seem more likely to allow such biased analyses to slip by. Indeed, the research shows just that... According to this same article in the Wall Street Journal:
"Companies with what experts consider weak corporate governance -- where the CEO is chairman of the board or where directors serve on multiple boards, for example -- are more likely to choose highly paid peers, the study found."