Institutional investors are strongly at odds with the way many US companies determine executive pay packages, according to a new study by Watson Wyatt Worldwide, a human capital consulting firm. Most believe there should be a stronger link between compensation and performance.
The survey of 55 institutions, managing a total of $800 billion in assets, shows that 90 percent of institutional investors think the current executive compensation system has overpaid executives, and 85 percent say it has hurt corporate Americaís image. Additionally, nearly two-thirds (64 percent) say executive compensation is not disclosed properly.
ìCompanies should take these findings seriously,î said Ira Kay, global director of Watson Wyattís compensation practice. ìWhile many companies are making progress in addressing these concerns, boards need to do a better job of reassuring investors that they are intent on paying for performance.î Kay also noted that institutional investors own about 60 percent of major corporations.
While institutional investors find fault with aspects of the current system, most have favorable views of stock incentives based on performance. For instance, roughly a third favor stock options or restricted stock that vests simply over time, but a majority support offering stock options or restricted stock that vest based on performance (favored by 65 percent and 70 percent, respectively).
Additionally, a majority of institutional investors (52 percent) think that the U.S. executive pay model has yielded high levels of executive stock ownership. Watson Wyatt research has consistently shown that companies with high levels of CEO share ownership financially outperform those with low levels.
Kay said companies should address investorsí concerns by considering a wide variety of actions, including limiting and fully disclosing perquisites, increasing the amount of executive pay based on performance and capping severance and change-in-control plans at the industry standard or less.
ìCompanies need to find the right balance between satisfying investors and recruiting and retaining the best executives,î Kay said. ìWhile that can be tricky, boards need to undertake the effort. Itís far better than continuing to risk public criticism, which could ultimately lead regulators to impose a one-size-fits-all solution.î
Other key findings from the survey include:
- Total Returns to Shareholders was the metric most often cited as an appropriate performance benchmark ó 38 percent mentioned it as the most important metric, while 62 percent cited it as one of the top three.
- A majority (60 percent) of investors believe that requiring executives to hold shares after option exercise or vesting is shareholder friendly.
- Two out of three investors (67 percent) favor having independent consultants report to the compensation committee, where for most investors, ìindependentî means that the consultant does not give management executive compensation advice.
Distributed by HR Marketer.com
Institutional investors dissatisfied with US Executive pay system, Watson Wyatt Study finds
Pay-for-Performance, Increased Disclosure Can Bridge Gap
