Every year, shareholders of U.S. companies weigh in on executive pay by casting advisory votes on the reports of compensation committees. The committees are appointed by corporate boards to make recommendations about appropriate pay levels. Shareholders tend to take their reports at face value, voting to approve them in over 97% of cases. But their confidence is undermined by a lack of awareness about the often flawed methods compensation committees use to determine pay.
The trouble is that compensation committees frequently rely on faulty performance metrics that inflate executive pay. But the committee reports do not provide a sufficient explanation of these metrics to shareholders.
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