It comes as no surprise that directors and investors disagree over whether executive pay is tied closely to performance. But the degree to which these two parties are at odds over pay is greater than one might imagine, according to a survey by Towers Watson.
The survey picked the brains of a rather small sample — 120 corporate directors and just 30 institutional investors. But it went into detail about their attitudes regarding executive pay, say-on-pay policies and pay vs. performance. The separation between the parties came through loud and clear as the questions became more specific.
Overall, both parties agreed that efforts to improve the U.S. executive pay model have borne fruit over the past five years. But while directors indicated most of the heavy lifting had been done, investors believe there’s still a lot of work to be done to rein in executive compensation and to tie it more closely to company performance. And neither party believes the Dodd-Frank CEO pay ratio disclosure rule will offer meaningful results.
Let’s take a look at the two sides to this exec pay coin:
- 20 percent of directors say the executive pay model in the U.S. has led to excessive CEO pay levels (a sharp drop in the past five years, TW says) but … 72 percent of investors say the pay model has led to excessive pay levels.
- 89 percent of directors believe executive pay is sensitive to corporate performance but … just 59 percent of investors believe executive pay is sensitive to corporate performance (both increased by about 50 percent since 2008, when a similar survey was conducted).
- 70 percent of directors say the executive pay model at most companies is closely linked to company strategy but … 34 percent investors believe there’s a close link.
- (23 percent) of directors say executive pay is overly influenced by management but … 66 percent of investors say executive pay is overly influenced by management.
- 13 percent of directors believe more frequent shareholder engagement would enhance the pay-setting process but … 66 percent of investors believe more frequent shareholder engagement would enhance the pay-setting process.
- 36 percent of directors say enhanced pay disclosure would help but … 84 percent of investors say enhanced pay disclosure would help.
- 34 percent of directors say more restraint in pay setting by boards and management would be useful but … 69 percent of investors advocate more board/management restraints.
“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. “Investors, however, seem to want an even greater voice in the pay-setting process and also improved communication between companies and shareholders. Despite investors’ views that executive pay is on the right path and their overwhelming support for company pay programs in say-on-pay votes at most companies, it’s clear that they also see considerable room for improvement.”