Boards and Shareholders Divided over Executive Pay

Investors see room for improvement, seek enhanced disclosure

By Stephen Miller, CEBS Jan 27, 2014

While agreeing that the U.S. executive-pay model has improved over the past five years, corporate directors and institutional investors remain divided over several key aspects, including the impact of say-on-pay voting, according to a new survey by consultancy Towers Watson and Alliance Advisors, a proxy solicitation firm.

More than 120 corporate directors and 30-plus institutional investors with combined assets under management exceeding $12 trillion participated in the survey, taken in October and November 2013.

Among the findings: Most directors (91 percent) and shareholders (97 percent) believe that the executive-pay model has either stayed the same or changed for the better since required say-on-pay shareholder voting began, in 2011. Additionally, the percentage of directors (89 percent) and investors (59 percent) who think executive pay is sensitive to corporate performance has increased by roughly 50 percent since 2008, when a similar survey was conducted.

However, the two groups disagree on several fronts, including the degree of alignment between company performance and strategy, the pay-setting process and whether executive-pay levels are too high. For instance, the survey revealed:

  • Only one in five directors believes that the executive-pay model in the U.S. has led to excessive CEO-pay levels—a sharp drop over the past five years—while nearly three in four investors think this is true.

  • Seven in 10 directors say the executive-pay model at most companies is closely linked to business strategy, but just one in three investors agree.

  • Fewer than one-fourth of directors think executive pay is overly influenced by management, versus two-thirds of investors.

“Given the strong level of shareholder support for say-on-pay votes the last three years, directors firmly believe they are doing a good job of addressing executive-pay issues and that revisions to the executive-pay model are generally working well,” said Andrew Goldstein, central division leader for executive compensation at Towers Watson, in a media statement. “Investors, however, seem to want an even greater voice in the pay-setting process and also improved communication between companies and shareholders.”

Improving the Process

Among the findings relating to improving executive pay-setting:

  • More than two-thirds of investors (but just 13 percent of directors) believe that more frequent shareholder engagement would enhance the pay-setting process.

  • More than twice as many investors (84 percent) as directors (36 percent) say enhanced pay disclosure would help.

  • While 69 percent of investors think more restraint in pay-setting by boards and management would be beneficial, only 34 percent of directors agree.

“These disconnects may stem from the fact that many investors aren’t fully informed about wha goes into the pay decision-making process at many companies,” said Reid Pearson, executive vice president at Alliance Advisors. “It seems clear from the survey responses that both groups of stakeholders feel the U.S. pay model has improved in recent years, but investor perceptions have not caught up with the view in the boardroom. This suggests that 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 also found a disparity in how directors and investors view say-on-pay’s impact on shareholder relations:

  • Only one-fourth of directors believe that say-on-pay votes have been a key driver of boards’ pay decisions, compared with 63 percent of investors who feel that way.

  • Seven in 10 directors think say on pay has affirmed the alignment of executive pay with company performance, versus only 41 percent of investors.

  • Directors are more than twice as likely as investors (35 percent versus 13 percent) to view say on pay as a waste of time and resources.

There were, however, some noteworthy areas of agreement between directors and major institutional investors. For example, a majority of respondents in both groups see the need for more disciplined target setting and for greater consideration of strategic, nonfinancial performance measures in annual and long-term incentives.

Moreover, neither directors nor investors think that the controversial Dodd-Frank CEO pay ratio disclosure rule will help improve the executive-pay model.

Stephen Miller, CEBS, is an online editor/manager for SHRM.​


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