Compensation remains the largest lightning rod of corporate governance and an ever-increasing area of intense scrutiny from investors/donors, employees, government oversight and even line-level employees. Boards must ensure Executive pay is externally competitive, fair, and aligned with internal organizational goals while addressing the expectations of all of the various interests of the previously mentioned scrutiny.
An Annual compensation study provides boards the data-driven insight needed to effectively navigate this complex landscape.
This article highlights the importance of compensation studies for both non-profit and for-profit organizations, backed by real-time research and industry best practices.
Ensuring Market Competitiveness
To attract and retain top executive talent, boards need to align compensation with industry standards.
A comprehensive annual compensation study benchmarks the totality of pay against peer organizations, preventing the practice of potential “overpayment” that strains resources or “underpayment” that risks talent loss.
Although, these comparisons focus on the top 5 officers as a byproduct of being publicly disclosed within annual financial statements, but the highest level of scrutiny lies at the feet of the CEO, which carries the highest level of variance across industries and sub-sectors.
- The Conference Board’s 2023 report on senior management compensation, covering nearly 2,500 companies in the S&P 500 and Russell 3000, highlights significant variations in CEO pay by industry and company size (Conference Board).
- For example, the 2023 average CEO-to-worker pay ratio for S&P 500 companies was 268:1, underscoring the need for regular benchmarking to remain competitive without unintentionally inflating organizational costs (Investopedia, 2025).
- Additionally, a recent Mercer Global Talent Trends report pinpoints that 78% of organizations use peer benchmarking methodologies to set executive pay, confirming the general exercise of annual studies (Mercer).
Why Aligning Pay with Performance is Key
Compensation should incentivize executives to drive long-term value creation for an organization. Annual studies enable boards to tie pay to performance metrics, such as financial results, strategic goals, or ESG outcomes.
- Harvard Business Review’s 2021 article, “Compensation Packages That Actually Drive Performance,” emphasizes the efficient balancing of fixed (base salary) and variable pay (short-term and long-term incentives) to align executive priorities with shareholder/stakeholder interests (Harvard Business Review).
- Further, Investopedia’s 2025 guide details that stock ownership is a key driver of performance, encouraging boards to adjust equity-based incentives annually to align to long-term growth, stability, and ultimately viability of the organization (Investopedia, 2025).
- A comment from a 2024 PwC report on executive compensation further supports Harvard’s review, stating that 65% of S&P 500 companies now include ESG metrics in pay plans, reflecting the need for annual reviews to adapt to ever evolving and maturating performance priorities (PwC).
Meeting Regulatory and Shareholder Expectations
Evolving regulations, such as SEC disclosure rules and shareholder “say-on-pay” votes, demand transparent and reasonably defensible compensation practices (primarily focused on the CEO and CFO positions).
Annual studies provide Boards the necessary data outputs needed to adhere to these requirements and buttress shareholder optics.
- The Economic Policy Institute’s 2019 report, “Reining in CEO Compensation and Curbing the Rise of Inequality,” stresses the importance of consistent SEC reporting on CEO-to-worker pay ratios to enhance transparency for legislatures and the general public.
- Regular reviews help boards more successfully avoid legal challenges and negative votes from proxy advisory firms like ISS or Glass Lewis, although company performance year-over-year and compensation changes are a constant moving target.
- For instance, ISS’s 2024 Proxy Voting Guidelines emphasize that a misalignment of CEO pay relative to performance (primarily Total Shareholder Return) can/will trigger adverse recommendations, underscoring the need for annual studies to more closely understand the level of adherence to these viewpoints (ISS).
- A 2023 Bloomberg Law analysis notes that 92% of S&P 500 companies faced “say-on-pay” votes in 2022, with 15% receiving less than 80% approval, highlighting the importance of regular reviews to maintain shareholder trust (Bloomberg Law).
Mitigating Risks and Promoting Fairness
Improperly structured compensation planning can lead to risks like short-term decision-making for an increase in instant compensation, while risking the long-term viability of the organization for individual gain. Further causing a potential public backlash due to the optics of possible wrongdoing, while having inadequate explanation of the actions taken.
Annual studies also help boards design balanced pay structures, addressing issues like perceived excessive stock options that incentivize a focus on the short-term, as noted in Investopedia’s guide.
Additionally, these studies highlight the growing concerns on pay disparities between the CEO and average worker.
- The Economic Policy Institute reports that the CEO-to-worker pay ratio grew from 31.4:1 in 1978 to 351.1:1 in 2020, with CEO pay rising over 1,300% while worker pay increased only 18% .
- A 2022 Georgetown Law article notes that 65% of respondents in a Fortune poll supported a “maximum wage,” reflecting public sensitivity to inequality.
- A 2024 Deloitte report further comments that 70% of boards now consider pay equity in compensation reviews to address public and employee concerns, reinforcing the role of annual studies in promoting fairness.
Enhancing Board Accountability
Annual compensation studies further demonstrate a board’s commitment to overseeing critical and far-reaching financial decisions, building trust with shareholders and stakeholders while maintaining a conductive relationship with management, a fine needle to thread.
- The CEPR article, “How Boards and Shareholders Design CEO Pay – and Where They Disagree,” suggests that regular reviews facilitate constructive dialogues on contentious issues like fairness, strengthening stakeholder confidence .
- A 2023 McKinsey report states that boards conducting annual compensation reviews are 30% more likely to receive positive shareholder feedback on their respective governance practices, highlighting their role in enhancing accountability and transparency (McKinsey).
Practical Implications and Best Practices
Boards can further enhance the effectiveness of ongoing annual studies by integrating and leveraging data via compensation consultants and industry surveys.
In many smaller organizations or non-profits, forming an executive compensation committee, as recommended by Diligent, ensures a thorough review of base salaries and performance-based incentives. Additionally, by maintaining adequate dialogue between management and the Board leads to higher levels of comfort with outcomes, and strengthens the bond between the two.
Lastly, boards should also engage shareholders in order to understand expectations, particularly on sensitive issues like pay equity.
Conclusion
As highlighted in this article, annual CEO compensation studies are a cornerstone and the overall linchpin of corporate governance, enabling boards to efficiently align executive pay with market standards, performance goals, and stakeholder expectations.
By ensuring competitiveness, regulatory compliance, internal and external risk mitigation, fairness, and accountability, these studies help boards navigate the complex landscape of executive compensation in non-profit and public organizations. .
Supported by technical research and industry perspectives, regular reviews are not just a best practice but a necessity for responsible governance and long-term value creation in today’s dynamic corporate environment.