Administration July 6, 2002

"Excessive" CEO Severance Pay Moves Institutional Investors

June 19, 2001 (PLANSPONSOR.com) - Institutional investors are increasingly likely to take action on concerns regarding senior management, a survey finds.
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In fact, while nearly 90% found CEO severance packages “excessive”, and more than half see those packages as contributing to shorter CEO tenures – 15% have already taken action to remove CEOs with shoddy performance records, according to a survey by Russell Reynolds Associates.

Of those that had taken steps, over half cited poor financial performance as the chief reason. In addition, two-thirds of investors surveyed have voted for a shareholder resolution within the past year, while15% have sponsored such a resolution.

Too Much Money

With regard to CEO compensation, the survey found that:

  • the vast majority (93%) believes CEO compensation should be more directly linked to performance,
  • almost 90% say that CEO severance packages are excessive, and
  • a little over 60% of US investors believe high severance packages contribute to the shortening of a CEO?s tenure by undermining the executive’s motivation to perform.

Survey participants were also asked to cite influential factors in the investment decision-making process. Results were as follows:

  • a company’s financial performance was cited by 94% of the sample,
  • the CEO’s performance was noted by 71%, and
  • three quarters cited the company’s valuation
  • more than half the sample listed corporate governance practices,
  • slightly less noted the quality of a company’s board,
  • the company’s adoption of specific accounting standards was cited by 49%.

Scorecard

In terms of CEO performance measures:

  • financial record of a company was cited by 70% of institutional investors polled;
  • company performance relative to the competition was noted by half the sample,
  • almost 40% mentioned stock price as key,
  • while only a third looked at company valuation.

In the US, investors express dissatisfaction with a CEO either through:

  • written communication, cited by 37%,
  • or selling their stock , 35%.

Investors in Europe and Asia convey opinions of a CEO’s performance through meetings with a company’s board and senior management.

The survey, “CEO Turnover in a Global Economy” was based on interviews with more than 300 institutional investors from Australia, Canada, France, Japan, the UK and the US.

– Camilla Klein       editors@plansponsor.com

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