Compensation Model Breeds Excessive Executive Pay, Study Finds

Corporate boards of directors and institutional investors disagree about whether the executive pay model has helped improve corporate performance, but they agree it has led to excessive levels of compensation, according to a Watson Wyatt Worldwide study.

Some 65 percent of responding directors believe the model has improved corporate performance, compared with only 39 percent of institutional investor respondents, a Watson Wyatt survey for its study found. But 61 percent of directors and 86 percent of institutional investors believe the model has led to excessive executive pay levels, and 75 percent of each group believes the executive pay model has hurt corporate America’s image.

Some 63 percent of directors in the survey think the executive pay system is improving, compared with 36 percent of institutional investors, but the pay model system has created employee resentment, according to 60 percent of directors and 78 percent of institutional investors.

Among recommendations for improving the pay model, the study says boards should “evaluate performance-based portions of executive pay plans” and “increase the use of performance-contingent (long-term incentive) programs and the level of executive pay opportunity to reflect pay for performance.”

The Watson Wyatt 2008 Report on Directors’ and Investors’ Views on Executive Pay and Corporate Governance: Managing Executive Compensation in the Shareholders’ Interests is based on a survey of 163 directors on the boards of 230 publicly traded companies and 42 privately held companies or nonprofit organizations that earned a combined $1.5 trillion in annual revenue; and 27 investors from union or public pension fund or foundations along with 45 from private-sector institutions that manage a total of $5 trillion in assets.

Filed by Pensions & Investments, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.