Institutional investors think corporate executives are “dramatically overpaid” and believe there must be a stronger link between pay and company performance.
The consulting firm Watson Wyatt Worldwide surveyed 55 institutional investors, representing a combined $800 billion in assets. The overwhelming majority – 90% – said corporate executives make too much, with 85% arguing that the hefty pay packages have hurt corporate America’s image.
Almost two-thirds of respondents said companies do not properly disclose executive compensation. (A recent Wall Street Journal report, for example, highlighted one little-known perk called “tax gross-ups.” Some major companies, including Home Depot and Coca-Cola Bottling Co., are covering large portions of their chief executives’ tax bills. Such payments, however, are typically hidden in corporate filings, the newspaper reported.)
Ira Kay, global director of Watson Wyatt’s compensation practice, said companies should be more responsive to shareholders’ compensation views. After all, institutional investors own approximately 60% of America’s major corporations.
“While many companies are making progress in addressing these concerns, boards need to do a better job of reassuring investors that they are intent on paying for performance,” Kay said.
Several shareholder groups, including Institutional Shareholder Services, TIAA-CREF and the American Federation of State, County and Municipal Employees, plan to make executive compensation a top agenda item for this year.
And in a letter sent to the Securities and Exchange Commission late last year, 10 pension funds from the United States, Canada and Europe pushed for a closer examination of the pay-to-performance issue.
The funds involved included the California Public Employees’ Retirement System, the California State Teachers’ Retirement System, two New York state pension funds, the Ontario Teachers’ Pension Plan and the State Board of Administration of Florida, according to USA Today, which obtained a copy of the confidential letter.
In the letter, the pension funds pointed to research that showed no relation between chief executive pay and company performance at many companies in the Russell 3000 index, which represents the overwhelming majority of the stock market.
Institutional investors responding to the Watson Wyatt survey said they would like to see more companies align performance with compensation. For example, a majority of respondents support offering stock options or restricted stock that would vest based on performance.
The survey also showed displeasure with executive severance packages for firings or acquisitions. About 75% described severance for involuntary termination as “shareholder unfriendly.”
A plethora of academic studies have recently demonstrated that executive compensation is ballooning. One such analysis by Lucian Bebchuk of Harvard and Yaniv Grinstein of Cornell found that the aggregate compensation paid by public companies to their top five executives totaled some $350 billion between 1993 and 2003 – or 10% of the aggregate profits of these companies during the last three years. These figures do not even include the pay perks that go above and beyond salaries, such as pensions.
The Securities and Exchange Commission, meanwhile, has proposed requiring companies to include much greater detail about executive perks and pay packages.
“Simply put,” said SEC Chairman Christopher Cox, “our rules are out of date.”
Under the proposal, annual filings would have to include tables detailing the total compensation – including stock options – for the chairman, chief financial officer and the three other highest-paid executives.
The threshold for disclosing perks would be reduced from $50,000 to $10,000.
Companies would also be required to provide disclosure tables for executive retirement benefits and director compensation.
Furthermore, companies would be forced to describe “in plain English” the objectives behind their executives’ pay.
At the very least, such “plain English” would go a long way toward demystifying executive pay.e notion that securities litigation can be used to improve corporate governance has officially arrived.