Corporate directors call for CEO pay reform

Directors say size of CEO pay is hard to control and some strategic review is needed. Despite this, most boards dismiss value of shareholder say on pay

A majority of corporate directors feel that boards are still having trouble in effectively managing the size of CEO compensation packages but feel that their own compensation committees are generally well equipped to deal with strategic pay issues, according to a new survey from PricewaterhouseCoopers (PwC). Most directors also feel that investor input on executive pay is of little to no use. Roughly 58 percent of the 1,110 who were surveyed, believe that controlling CEO pay is a problem that needs to be immediately addressed.

‘Directors in their own companies understand the challenges,’ says Catherine Bromilow, partner in PwC's Center for Board Governance. ‘They have a greater sense of how their companies are organized and what is appropriate when rewarding management but there are discrepancies that indicate other boards aren’t quite doing it as well.’

The study further reveals that compensation committees should pay close attention to three metrics in particular: Eighty-three percent of respondents said directors need to make sure a firm's peer companies, or those they compare their CEO pay to, are more realistic. Eighty-two percent said boards need to reevaluate compensation benchmarks, and 65 percent said minimum stock ownership guidelines could be a suitable approach to keeping pay issues in check. Interestingly, none of these issues are directly dealt with under the Dodd-Frank legislation.

Many directors also disagree with the usefulness of investor say-on-pay votes with 82 percent of those surveyed stating they did not believe that investors should have a ‘say on pay,’ a figure that dropped from 92 percent in 2007.

‘Directors inside a boardroom know how complex it is to structure compensation,’ explains Bromilow. ‘In a director’s mind, it is difficult for a shareholder to understand the total elements of a CEO’s pay package.’

As for director’s pay, more than half believes that their pay should stay the same, but approximately 34 percent think that their pay should increase by less than 25 percent, while 11 percent think their pay should increase by more than 25%, Bromilow confirms. In addition Bromilow points out that as compensation issues continue to be a growing concern, in the future, ‘boards will be well-served by closely examining their compensation policies and how well their rewards link to a company’s performance.

The survey was sent in April 2010 - prior to the passage of the Dodd-Frank Bill - to 10,000 directors at the top 2,000 companies by revenue.

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  1. Bruce Colwin|

    Thought I'd share this recent LegalMinds/NASDAQ Securities & Capital Market Series interview with David Lynn, co-chair of the Morrison & Foersters' Public Companies and Securities Practice and former Chief Counsel at the SEC, who discusses the impact of Say on Pay on the upcoming proxy season ...

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