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Peer Groups Understanding CEO Compensation and a Proposal for a New Approach

The use of external peer benchmarking in setting executive compensation has contributed to the problem of high and rising pay in the United States. The pay awarded to CEOs is becoming profoundly detached from not only the pay of the average worker, but also from the companies they run. Offsetting the current reliance on external metrics with the use of internal metrics and benchmarking could help curb the persistent escalation of pay. If directors are not constrained by notions of “competitive” pay, they may be able to reduce unnecessary pay increases and deliver compensation that is more acceptable to shareholders.

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