Most institutions think CEOs are paid ‘excessively’

Jan 23, 2014
<p>More than 70 percent of institutional investors blame compensation model for overpaid executives</p>

Institutional investors are fundamentally at odds with company directors over the best measures to deal with inflated executive pay, finds a study carried out by Towers Watson and proxy solicitation firm Alliance Advisors.

The vast majority of investors and directors – more than 90 percent in both cases – believe the executive pay model has either stayed the same or improved since say-on-pay votes were introduced.

Unsurprisingly, however, the survey concludes that institutional investors are far more critical than directors when it comes to the US’ current executive pay structure: 72 percent of investors say the current pay model has led to ‘excessive pay levels’, according to the report, while only 20 percent of directors agree.

Seven in 10 directors think pay models are too inextricably linked to company strategy to be meaningfully changed, compared with just one in three investors (34 percent). More than two thirds of investors assert that more frequent engagement with shareholders would make any efforts to clamp down on executive pay easier; only 13 percent of the directors questioned agree.

‘Investors... seem to want an even greater voice in the pay-setting process and also improved communication between companies and shareholders,’ says Towers Watson’s central division leader for executive compensation, Andrew Goldstein. ‘Despite investors’ views that executive pay is on the right path and their overwhelming support for company pay programs in say-on-pay votes at most companies, it’s clear they also see considerable room for improvement.’

More than twice as many investors as directors – 84 percent compared with 36 percent – think enhanced disclosure about remuneration would help the situation. Sixty-nine percent of investors and 34 percent of directors also urge boards and management to show more restraint in setting levels of pay initially.

Reid Pearson, executive vice president at Alliance Advisors, says the difference in opinion may well result from investors not being fully informed about pay-making decisions. ‘It seems clear from the responses that both groups of stakeholders feel the US pay model has improved in recent years, but investor perceptions have not caught up with the view in the boardroom,’ he explains.

‘This suggests companies need to do more to help investors understand the challenges boards face in aligning pay with performance and setting appropriate pay levels, reinforcing the need for greater transparency and engagement.’

The survey – snappily named ‘Evolving director and investor views of executive pay in the say-on-pay era’ – was conducted in October and November 2013 among more than 120 corporate directors and 30 institutional investors with combined assets under management in excess of $12 tn.

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