Internal Equity and Executive Pay

Despite increasing unease with the levels of top executive compensation, a recent WatsonWyatt/WorldatWork study shows that 73% of large companies want their top executives to be at or above the median compensation levels for their industries. As Ed Woolard, former CEO at DuPont and chair of the New York Stock Exchange's executive compensation committee recently argued, this can only lead ever upwards: "CEO pay is driven today primarily by outside consultant surveys - and the fact that many board members have bought into the concept that your CEO in your company has to be at least in the top half, and maybe in the top quartile. So we have the 'ratchet, ratchet, ratchet' concept. We all understand it well enough to know that if everybody is trying to be in the top half, everybody is going to get a hefty increase every year." The full speech is available online.

Woolard, along with a growing number of industry groups focusing on executive pay (most notably CompensationStandards.com), propose instead a concept of "internal equity," in which more emphasis is placed on how executives are paid relative to other people in the company. The Committee for Effective Employee Ownership (CEEO), a project of the NCEO, the Beyster Institute, and the Global Equity Organization, also argued for this approach in its position statement last year. As the NCEO's recent data on executive compensation in ESOP companies showed, ESOPs, in general, seem already well in tune with this concept.