The Advisors' Blog

– Subodh Mishra, ISS Governance Exchange

Corporate board members and institutional investors are divided on the state of executive pay in the U.S., according to a survey by Towers Watson and proxy solicitor Alliance Advisors. The survey, released Jan. 16, finds a stark divergence of opinion between the two groups on what has given rise to “excessive” CEO pay and whether pay is closely linked to company strategy. Indeed, just 20 percent of directors said the executive pay model in the U.S. has led to excessive CEO pay levels, while 72 percent of investors surveyed say the model has led to excessive pay levels. The figure for directors represents a sharp drop over the past five years, moreover, Towers noted in a statement.

Meanwhile, 70 percent of directors surveyed said the executive pay model at most companies is closely linked to company strategy, compared with just 34 percent of investors. Additionally, roughly one-fourth of directors say executive pay is “overly influenced” by management, compared with just under two-thirds of investors surveyed.
“These disconnects may stem from the fact that many investors aren’t fully informed about what goes into the pay decision-making process at many companies,” said Reid Pearson, executive vice president at Alliance Advisors, in a Jan. 16 statement. “This suggests that companies need to do more to help investors understand the challenges boards face in aligning pay with performance and setting appropriate pay levels, reinforcing the need for greater transparency and engagement.” The survey, conducted in October and November 2013, gauged responses of more than 120 corporate directors and 30 institutional investors with combined assets under management exceeding $12 trillion.

Other areas where an incongruence of opinion is evidenced include the value of engagement, with more than two-thirds of investors believing more frequent shareholder engagement would enhance the pay-setting process, compared with just 13 percent of directors. More than twice as many investors as directors say enhanced pay disclosure would help, as would more restraint in pay setting by boards and management, according to survey findings. Notably, the poll of both groups found neither directors nor investors think the Dodd-Frank CEO pay ratio disclosure rule “will help improve the [pay] model,” according to a statement announcing the findings.

With regard to say-on-pay, the survey found a significant variance in how directors and investors view the efficacy of say-on-pay votes, first adopted marketwide in 2011. Just one-fourth of directors believe such votes have been a “key driver” of pay decisions by boards, compared with 63 percent of investors.

Meanwhile, seven in 10 directors believe say-on-pay has “affirmed the alignment” of executive pay and company performance, compared with just four in 10 investors. Finally, 35 percent of surveyed directors say they view say-on-pay “as a waste of time and resources,” compared with 13 percent of investors.

The study did find noteworthy areas of agreement between the respondent groups. A majority of both groups “see the need for more disciplined target setting” and for greater consideration of strategic, nonfinancial performance measures in annual and long-term incentives. The survey found that more than 90 percent of both directors and shareholders believe the executive pay model “has either stayed the same or changed for the better” since say-on-pay votes were required. Additionally, the percentage of directors (89 percent) and investors (59 percent) who believe executive pay is sensitive to corporate performance has increased by roughly 50 percent since 2008, when a similar survey was conducted.