Human Capital & Careers

Directors Say Exec Pay Hurts Image

Two-thirds of board members also believe that the current model for executive compensation has contributed to superior corporate performance, accor...
Stephen TaubJune 20, 2006

Board members agree with institutional investors that the current pay model for executives has hurt Corporate America’s image. The two groups differ widely, however, on how the current system contributes to corporate performance and on whether it contributes to excessive executive pay.

According to a new report from Watson Wyatt Worldwide, 79 percent of the 50 directors surveyed by the human-capital consultancy said the executive pay model has hurt the image of corporations in general. In an earlier survey, 85 percent of institutional investors agreed with that position.

However, while 65 percent of directors said they believe the pay model has contributed to superior corporate performance, just 22 percent of institutional investors shared that view. Institutional investors were also more likely than directors to say that executives at most companies are overpaid (90 percent, compared with 61 percent) and that they have too much influence in how their pay is determined (87 percent, compared with 48 percent).

To be sure, the two groups agree on a number of pay-related issues.

More than three-quarters of directors as well as institutional investors said they support better disclosure of executive pay information in proxy statements, currently the subject of a proposal by the Securities and Exchange Commission.

Their motivations may be different, however, pointed out Ira Kay, global director of compensation consulting at Watson Wyatt, in a press release. “While shareholders may view enhanced disclosure as a way to curb an out-of-control pay system, directors may regard it as a way to demonstrate that the system generally works and to expose potential abuses,” noted Kay.

Directors and institutional investors also both strongly favor performance-based pay structures but disagree on a number of specifics, according to Watson Wyatt. The vast majority of directors believe that base salary, severance or change-in-control agreements, and SERPs should be targeted at the market median, but 60 percent favor targeting long-term incentives above the market.

The consultancy noted that 61 percent of institutional investors also favor targeting long-term incentives above the market median but say that severance or change-in-control agreements should be positioned below the median.