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Investors, Directors Face Off over Exec Pay

The two groups don't agree on much when it comes to how public companies pay their top leaders.
Sarah Johnson, CFO.com | Europe
February 28, 2008

The majority of both company directors and institutional investors believe Corporate America's image has been shattered by the way companies pay their executives. But that's about all they agree on. Their views on the topic differ markedly when it comes to changing the system, according to a new report from consultancy Watson Wyatt.

One high-profile solution to what some perceive as excessive executive pay packages will have little effect, according to the 163 directors and 72 investment and pension fund managers who responded to Watson Wyatt's survey. The Securities and Exchange Commission's new compensation-disclosure rules, implemented last year, have brought more transparency into what goes into pay decisions, but they likely won't have much impact on executive pay levels, the respondents conclude.

Still, 63 percent of directors believe the current compensation system is getting better, and 65 percent think it has improved corporate performance; the corresponding numbers among investors were 36% and 39%, respectively. "While directors believe the system generally works, institutional investors generally feel the model's flaws run deeper and require more substantial changes," said Ira Kay, Watson Wyatt's global director of compensation consulting. "Clearly, more works needs to be done."

What could those changes entail beyond the SEC additions to the compensation discussion and analysis section of company's proxy statements? For one, shareholders would love to have more influence in how much executives are paid, such as through so-called "say on pay" initiatives allowing them to cast a nonbinding, advisory vote on executive compensation. More companies are adopting these measures, and last year the U.S. House of Representatives passed a bill that would require companies to allow such votes.

Directors would rather shareholders not be directly involved in pay packages. Nearly half told Watson Wyatt they think investors should play no role, and only 8 percent said they should be able to provide a nonbinding, advisory vote.

The tussle over the subject of pay partly is defined by the two groups' inherent points of view, according to the consultancy. Investors scrutinize pay packages based on the level of salary and bonus numbers. In contrast, directors think about pay in the context of the value it creates, what their competitors are paying, and its connection to an executive's performance.

The issue of performance has institutional investors squawking. Only 39 percent believe executive pay is linked to corporate performance, whereas 86 percent say companies' current pay models have led to excessive pay levels.

When companies begin to release their proxy statements over the next few weeks, some of the debate could be abated. Watson Wyatt suggests directors will be poised to better explain through this second round of CD&A disclosures that current pay models are working.




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