US Executive Pay Controversy Wounding Corporate Image

A news release said a Watson Wyatt Worldwide poll of 50 corporate directors found that 79% see image damage from allegations that CEOs and directors have sometimes benefited from compensation packages that are out of line with their corporate performance.

The corporate directors and the institutional investors who were also polled had very different views on some issues. Two thirds (65%) of directors said they think the executive pay model has contributed to better corporate performance, compared with 22% of institutional investors. Nine in 10 institutional investors think executives at most companies are overpaid, and 87% believe executives have too much influence in how their pay is determined. The directors polled had a more neutral view; 61% said that most executives are overpaid, and 48% asserted that executive pay is too heavily influenced by executives.

“Despite major reforms, executive pay and corporate governance continue to be a source of controversy,” said Ira Kay, global director of compensation consulting at Watson Wyatt, in the news release. “While the views of directors and institutional investors on executive pay issues are closely aligned in many areas, we found several differences between the groups, demonstrating that more work is needed on a few key issues.”

The report also noted that more than three out of four directors and institutional investors favor enhanced disclosure of executive pay information in proxies.

Both groups strongly back pay-for-performance compensation but disagree over how specific pay elements should be positioned relative to the market, according to the report. The vast majority of directors believe that base salary, severance or change-in-control agreements and SERPs should be targeted at the market median. However, six out of 10 directors favor targeting long-term incentives above the market. Most institutional investors (61%) also favor targeting long-term incentives above the market median but say that severance or change-in-control agreements should be positioned below the market median.

Other findings from the report include:

• Two-thirds of directors agree that the executive pay model has yielded high levels of executive stock ownership at most companies.
• Like institutional investors, directors mostly agree (86%) that stock incentives are shareholder-friendly when they have performance-contingent vesting.
• Compared with institutional investors, directors are more neutral toward severance plans, especially at a change in control – in part because they perceive a tighter market for executives.

More information about the survey report is at www.watsonwyatt.com .