Corporate Directors, Institutional Investors Remain Divided Over Current
State of Executive Pay, Towers Watson and Alliance Advisors Survey Finds
Despite changes in the executive pay model, investors see room for more
NEW YORK -- January 16, 2014
While agreeing that the U.S. executive pay model has improved over the past
five years, corporate directors and institutional investors remain divided
over several key aspects, including the impact of say-on-pay voting, according
to a new survey by global professional services company Towers Watson (NYSE,
NASDAQ: TW) and Alliance Advisors, a proxy solicitation firm.
The survey found that most directors (91%) and shareholders (97%) 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%) and investors (59%) who believe executive pay is sensitive to corporate
performance has increased by roughly 50% since 2008, when a similar survey was
conducted. However, the two groups disagree on several fronts, including the
degree of alignment between company performance and strategy, the pay-setting
process and whether executive pay levels are too high:
*Only one in five (20%) directors say the executive pay model in the U.S.
has led to excessive CEO pay levels, a sharp drop in the past five years,
while nearly three in four (72%) investors say the pay model has led to
excessive pay levels.
*Seven in 10 (70%) directors say the executive pay model at most companies
is closely linked to company strategy, compared with just one in three
*Less than one-fourth (23%) of directors say executive pay is overly
influenced by management, versus two-thirds (66%) of investors.
“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,” said Andrew Goldstein, central division leader for
executive compensation at Towers Watson. “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.”
Directors and Investors Divided on Improving Pay-Setting Process
More than two-thirds of investors (versus just 13% of directors) believe more
frequent shareholder engagement would enhance the pay-setting process. More
than twice as many investors (84%) as directors (36%) say enhanced pay
disclosure would help, as would more restraint in pay setting by boards and
management (69% of investors versus 34% of directors.) Interestingly, neither
directors nor investors think the Dodd-Frank CEO pay ratio disclosure rule
will help improve the model.
“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.
“It seems clear from the survey responses that both groups of stakeholders
feel the U.S. pay model has improved in recent years, but investor perceptions
have not caught up with the view in the boardroom. 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 also found disparity in how directors and investors view
say-on-pay’s impact on shareholder relations. Only one-fourth (26%) of
directors believe say-on-pay votes have been a key driver of pay decisions by
boards, compared with 63% of investors who feel that way. Seven in 10
directors (72%) believe say on pay has affirmed the alignment of executive pay
and company performance, versus only 41% of investors. Finally, directors are
more than twice as likely as investors (35% versus 13%) to view say on pay as
a waste of time and resources.
There were, however, some noteworthy areas of agreement between directors and
major institutional investors. For example, a majority of those surveyed in
both groups see the need for more disciplined target setting and for greater
consideration of strategic, nonfinancial performance measures in annual and
“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. The good news
is that 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,” said James Kroll, a director at Towers Watson who leads the
company’s governance advisory practice for executive compensation.
About the Survey
The survey, Evolving Director and Investor Views of Executive Pay in the
Say-on-Pay Era, was conducted in October and November 2013. More than 120
corporate directors and more than 30 institutional investors with combined
assets under management exceeding US$12 trillion participated.
About Towers Watson
Towers Watson (NYSE, NASDAQ: TW) is a leading global professional services
company that helps organizations improve performance through effective people,
risk and financial management. The company offers consulting, technology and
solutions in the areas of benefits, talent management, rewards, and risk and
capital management. Towers Watson has more than 14,000 associates around the
world and is located on the web at towerswatson.com.
About Alliance Advisors
Alliance Advisors is a shareholder intelligence firm that specializes in proxy
solicitation, corporate governance consulting, proxy contests, information
agent services and proxy management. Founded in 2005, the firm services more
than 350 corporate clients nationwide.
Ed Emerman, +1 609-275-5162
Binoli Savani, +1 703-258-7648
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