The median American household income, according to the U.S. Census Bureau, was $51,017 in 2012. So, when most Americans look at the amount of money being earned by CEOs of Fortune 400 companies, it’s no surprise their jaws drop. To the 95.5% of households bringing in less than $200,000, being paid several hundred thousand dollars a year is something they’ll never experience.
So when we look at CEO pay, most of the time, the numbers seem incredibly exorbitant. It’s hard to know what’s fair when there’s nothing to compare by. How can we determine how much money is too much?
The Securities and Exchange Commission recently issued a rule that companies must publish a comparison of CEO pay and the median employee pay, something that would add accountability but not necessarily solve any problems if it goes into effect. Of course there is a gap in pay between CEOs and the average company employee—and it makes sense, to a point. More responsibility and deciding power lies with CEOs than the average Joe. Pointing out that vast gulf doesn’t answer the question of whether the pay is too much, though.
There is much more to determining pay fairness than just the industry or pay gap. Knowing what is fair can more easily be determined when companies are compared to their “peers,” or other similar companies. Doing so would both help businesses stay accountable to shareholders, and would help companies determine if what they are paying executives is fair or not.
Peer groups are already widely used by companies, but not necessarily well. While companies do often compare themselves with “similar” companies, that’s not always the case. Too often, “peer” companies listed in reports have far larger incomes and are more complex organizations. Thus, they do not serve well as “peers.”
Equilar, an executive compensation benchmarking and analytics company based out of Redwood City, CA, is working with shareholders to solve that problem. Investors can use Equilar’s peer groups to vet companies and determine whether executive pay is exorbitant or fair.
These alternative peer groups are determined by an algorithm that uses SEC filings and social media to generate peer groups that don’t just use industry as a starting point. By using social media peer mentions, Equilar then builds “relationship maps” that tie companies together. Essentially, instead of companies listing companies they’d like to consider themselves peer to, Equilar lists companies they actually are peer to.
Are peer groups like Equilar’s the answer to solving the exorbitant executive pay problem? Probably not, but it’s a good start. At least it gives us a solid platform from which to compare companies.