Moody’s Identifies Red Flags in Benchmarking Executive Pay

Moody’s
identifies red flags regarding executive compensation in a new analysis
of the SEC’s expanded disclosure requirements. Of particular note are
Moody’s comments on how companies can “game the system” when
benchmarking executive pay against peers.

Moody’s lists the following red flags to look for when assessing peer groups:

• Too many firms listed (more than 15)


• Bias toward “peers” that are substantially larger and/or more profitable


• Multiple peer groups with unusually high CEO pay, particularly if not direct competitors


• Too many industries and geographic markets included


• Peers that do not compete with the issuer for executive talent


• Unexplained year-to-year peer group changes

These red flags can be a concern to investors because of the potential to “game” the pay-setting process.

For example, Moody’s says, a company may select a peer group
composed of companies that are substantially larger than itself; that
set a high percentile pay target (75th percentile or greater); or that
operate in a more profitable sector. This practice can indicate an
undisciplined pay-setting process and weak board oversight.

That said, some companies provided useful peer group disclosure in
their 2008 proxy statements, including key factors about the peer group
like revenues, asset size and number of employees, Moody’s says.

The full report Expanded Disclosure On U.S. Executive Compensation Offers New Clues For Creditors is available for purchase.