Institutional investors believe CEOs are overpaid — survey

Some 72% of institutional investors believe the U.S. executive pay model has led to excessive CEO compensation levels, almost four times the 20% of corporate directors holding such a view, according to results released Thursday of a joint survey by Towers Watson and Alliance Advisors.

Only 34% of responding institutional investors say the executive pay model at most companies is closely linked to company strategy, compared to 70% of responding directors.

Institutional investors and corporate directors also displayed sharp differences on the influence of say-on-pay voting on executive compensation.

Some 63% of institutional investors believe say-on-pay votes have been a key driver of pay decisions by boards, compared with only 26% of responding directors.

Only 41% of investors, in contrast to 72% of directors, believe say-on-pay voting has affirmed the alignment of executive pay and company performance.

Some 13% of investors view say on pay as a waste of time and resources, about one-third as many as the 35% of directors who feel that way.

Among the findings, 97% of institutional investors and 91% of directors believe the executive pay model has either stayed the same or changed for the better since say-on-pay votes were required.

“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,” Andrew Goldstein, central region practice leader for executive compensation at Towers Watson, said in a statement.

“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.”

More than 30 institutional investors with combined assets under management exceeding $12 trillion and more than 120 corporate directors participated in the survey, conducted last October and November.

Towers Watson's focus includes investment and other financial management consulting. Alliance Advisors' business includes proxy solicitation and corporate governance consulting.

Some 69% of investors believe more frequent shareholder engagement would enhance the pay-setting process, more than five times as much as the 13% of directors holding that view.

Some 84% of investors, compared with only 36% of directors, “say enhanced pay disclosures would help improve setting pay, while 69% of investors and 34% of directors as would more restraint in pay setting by boards and management.

Only 25% of investors, compared to 11% of directors, believe the disclosure of the ratio of CEO pay compared to the pay of the rest of the employees, as required under the Dodd-Frank Wall Street Reform Consumer Protection Act will help make the executive compensation model more effective.

“Directors and investors have made great strides in the say-on-pay era to enhance the executive pay model, but more work needs to be done,” James Kroll, a director at Towers Watson who leads the firm's governance advisory practice for executive compensation, said in the statement.

“The good news is that, as the survey shows, possible common ground exists on which future alignment can be built, and there are also areas where directors may be well-served to pay closer attention to how their decisions on executive pay issues are perceived by the investor community.”