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This article is based on the idea that executive compensation at many companies in the United States is too high. It implies that one reason for this is that companies use faulty procedures for deciding how much to pay their executives. It presents the story of a company that provides other firms with a better way to determine their executives’ compensation.
At many companies, executive pay is determined by looking at a set of peer companies. The idea is that the firm should look at companies like it and see how much those companies pay executives. The firm should then set its own executives’ pay accordingly.
The problem, according to this article, is that companies tend to pick peers that are not really peers. They tend to pick companies that are much larger than them instead of companies that are more their size. This leads to inflation of executive salaries because companies pay their executives salaries that are more in line with salaries earned by executives of much larger companies.
The article profiles a company called Equilar. This company helps determine what companies would be appropriate peers for a given company. By doing so, Equilar can help to rein in the amount of pay that executives are getting.
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