October 30, 2013
Survey: Boards Worried About Pay Gap Between CEOs & Senior Managers
– Subodh Mishra, ISS Governance Exchange
Given the “sensational” performance of the stock market in 2013, one-third of public company board members are concerned that a focus on equity pay is leading to a growing gap in compensation between the CEO and other members of the management team, according to findings from a BDO USA survey.
Of those expressing concern, the survey–conducted in September with 74 corporate directors of public company boards with revenues ranging from $250 million to $750 million–finds a majority (56 percent) believe the best approach to address the gap is to expand equity-based compensation to more members of the management team, while one-third (33 percent) suggest moving a larger portion of CEO compensation back to traditional, long-term cash or annual cash incentive programs, according to a statement. Just 11 percent suggest re-introducing executive perquisites back into the compensation mix for key employees.
“The concern with the gap in compensation between the CEO and other members of management is a subject we are increasingly being asked to address by clients,” said Randy Ramirez, senior director on compensation in the groups’ corporate governance practice. “Given the ongoing increase in equity markets and the SEC’s current proposal to require companies to disclose the ratio of CEO pay to median employee pay, this issue is only going to get bigger. Boards must decide whether they want to close the gap by expanding equity pay to other members of management, moving more CEO compensation back to traditional compensation or a combination of both of these strategies.”
When asked what performance measurement they consider the best substitute for at least a portion of equity-linked pay, board members cite profit growth (39 percent) and free cash flow (24 percent) as the most likely substitutes. Operational efficiency (18 percent), revenue growth (14 percent), and market share (6 percent) are the other alternative measurements cited by the directors.
Meanwhile, the survey finds 84 percent of directors expect to the spend the same amount of time on executive pay-related issues as last year, with just 8 percent saying the time allocation would be less, and another 8 percent saying more. By comparison, close to half of the board members cite succession planning (47 percent) and studying industry competitors (45 percent) as areas they would like to spend more time on, underscoring the dominance of pay in board discussions.