Are compensation committees covering for high CEO pay?

FORTUNE -- When you want to understand whether the CEO runs the board or the board oversees the CEO, a good place to start is to look at the work of the Compensation committee. Compensation committees so impact how companies are run that NYSE and NASDAQ listing standards require that Compensation Committees be comprised only of independent board members.

A new study released by the IRRC Institute provides a report card on some of the activities of compensation committees with insights into how well the committees are doing their job and who's really running the show.

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Peer selection

As a benchmark for determining reasonable pay, many Compensation Committees choose a set of "peer" companies to measure themselves against. In proxy disclosures, the reason usually given for choosing a set of comparison companies is to ensure the pay for their CEO is reasonably in line with their peers. However, in picking peers, compensation committees tend to select peers that are larger than the company in terms of both revenue and market capitalization, the study showed. In some cases, peer companies weren't even just a little larger, but were twice the size, in market capitalization, of the company itself. Of course, choosing larger peers helps tend to skew pay benchmarks higher, resulting in higher CEO pay.

Pay relative to Peers Chosen

Although many proxies say that peer selection is used to ensure CEO pay is reasonable and in line with peers, the study showed some wide discrepancies between the earnings of CEOs at the peer firms, chosen by the compensation committee, and the awards made by some compensation committees to their own CEOs.

For example, in its latest proxy, which is similar to the one from the year before, petroleum services company Nabor Industries (NBR) states that "In considering the appropriateness of the compensation arrangements ... the Compensation Committee reviewed market data from ... companies in the oilfield sector, which were selected with the input of BDO Seidman based on their industry affiliation and size."

Continuing, the proxy states: "The Compensation Committee did not target ... a specific percentile within the peer group." But maybe they should have -- because it is unclear how the peer companies gave them comfort in the appropriateness of CEO Isenberg's pay for the three years ending 2008. The IRRC/study showed, for that time period, his pay was nowhere close to that of the peers. It was almost 6 times the median for the peers the Committee had selected. (Mr. Isenberg is 80 and has served as Chair and CEO since 1987.)

The historical differences, however, did not appear to concern all Nabor Industry shareholders. A majority of them, despite this, voted down a shareholder proposal for an advisory say on pay.

Meanwhile, in the case of Juniper Networks (JNPR), according to its proxy, consulting firm Mercer's "fees for executive compensation consulting in fiscal year 2009 were approximately $215,000" and among other tasks, included assessing "the alignment of the Company's compensation levels relative to performance against primary peer companies and relative to the Compensation Committee's articulated compensation philosophy".

In the case of the CEOs at Juniper, the IRRC/Proxy Governance study found their pay was, on average, 4.5 times the selected peers' median over the three years ending 2008. (By the study's measures, both Nabors and Juniper underperformed their peers.) Despite this, at the annual meeting, Juniper shareholders approved increasing the number of shares available for executive compensation by 30 million.

Some other study highlights? Larry Ellison at Oracle (ORCL, Fortune 500) is compensated 4.3 times the pay of the peers looked at by his company's compensation committee. Alleghany Technologies (ATI) CEO: 3.6 times. Massey Energy's (MEE) CEO: 2.7 times.

Admittedly, those are extreme cases. So how prevalent is it that CEO pay is well over the pay for benchmark peers chosen by the Compensation Committee itself? Of the Russell 3000 companies reviewed, in nearly 30% of cases, CEO pay was 1.5 to over 4 times the peer median.

Clearly, this scorecard would suggest some Compensation Committees aren't getting passing marks. Are they just not doing their homework -- or is the CEO doing it for them? That's the question every investor must decide.

Eleanor Bloxham is CEO of The Value Alliance and Corporate Governance Alliance (http://thevaluealliance.com), a board advisory firm.