Investors and boards still differ on pay

The results of a recent study of corporate directors and institutional investors suggest there could be more aggressive shareholder actions taken regarding CEO pay this proxy season. Towers Watson and Alliance Advisors teamed up to conduct the survey of more than 120 corporate directors and more than 30 institutional investors, with combined assets of $12 trillion. They found the following: 

• One in five directors (20 percent) say the executive pay model in the US has led to excessive CEO pay levels, a sharp drop over the past five years; nearly three in four investors (72 percent) say the pay model has led to excessive pay levels.
• Seven in 10 directors (70 percent) say the executive pay model at most companies is closely linked to company strategy, compared with just one in three investors (34 percent).
• Less than a quarter (23 percent) of directors say executive pay is overly influenced by management, versus two-thirds (66 percent) of investors.

These results suggest a bigger disagreement over CEO pay than has been reflected by say on pay voting over the last three years. In fact, most corporate pay plans have been accepted by investor votes, which leads directors to ‘believe they are doing a good job of addressing executive pay issues, and that revisions to the executive pay model are generally working well,’ according to Andrew Goldstein, central division leader for executive compensation at Towers Watson.

However, when 72 percent of institutional investors say the current pay models have led to excessive pay levels, 66 percent think pay is overly influenced by management and only 34 percent think pay is linked with corporate strategy, things can’t be working that well. If we are to believe what this survey seems to be saying, we have to ask: are the views of institutional investors being accurately reflected in the say on pay voting?

Goldstein explains the results thus: ‘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.’

It doesn’t seem to be clear to corporate boards that institutional investors want substantial improvement regarding executive pay, so don’t be surprised if shareholders begin finding other ways to express their concerns. This could manifest itself in more shareholder proposals or more direct talks and negotiation with institutional investors prior to the annual meeting. Undoubtedly, talks will happen first, so companies should prepare themselves for discussions about the pay ratio disclosure mandated by Dodd Frank. Institutional investors’ attitudes toward executive pay could change significantly since last year, depending on the pay ratio number management presents. Pay plans that passed in 2013 are not guaranteed to pass in 2014. With economic growth forecast at 3 percent or higher this year, investors will be interested in making sure most of that growth makes it into their portfolios -- not into CEOs’ pockets.