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Directors Are Shocked (Shocked!) at Sky-High CEO Pay, Just Not at Their Own Companies

Despite new SEC disclosure rules that were expected to better explain to investors the pay mechanisms of top managers, the number of directors who feel pay is out of control is about the same as last year.

October 5, 2007
Related Topics: Corporate Culture, Compensation Design and Communication, Latest News
Believe it or not, corporate directors are as fed up with soaring CEO pay as shareholders are. But here’s the news flash: only at other companies, not their own.

Two-thirds of directors believe that U.S. corporate boards are “having trouble” controlling the size of CEO compensation, according to a new survey from accounting firm PricewaterhouseCoopers. Most, however, believe their own companies are doing a good job of setting pay, and that other boards are to blame for the problem, says Catherine Bromilow, a partner with PwC and leader of its U.S. corporate governance group.

“It’s really a not-my-backyard philosophy,” Bromilow says. “These directors are saying, ‘Look, we know how good our CEO is and how rigorous our processes are. We’re OK, but everyone else has a problem.”

Despite new SEC disclosure rules that were expected to better explain to investors the pay mechanisms of top managers, the number of directors who feel pay is out of control is about the same as last year, the study found. Last year, the average CEO of an S&P 500 company got $14.8 million in total compensation, up from $13.4 million in 2005, according to the Corporate Library.

Of the 760 directors polled, 41 percent says boards and compensation committees need to take a “firm stand” to promote change. Thirty-one percent says more pressure from institutional shareholders and institutional investors will help curtail spiraling growth of CEO pay.

Shareholders are certainly doing their part. Last week at video game maker Activision, 69 percent of shareholders voted in favor of a proposal that would give them a nonbinding vote on executive compensation--the highest in-favor tally in two years of so-called “say on pay” votes. The company became the seventh to have such a proposal reach majority support, according to RiskMetrics Group, a governance research firm. (For their part, 92 percent of directors are against giving shareholders such a vote, and just 10 percent believe they should play a bigger role in answering investors’ questions at annual meetings.)

Meanwhile, directors seem to be losing their enthusiasm for the new disclosure rules, which the Securities and Exchange Commission put into effect late last year. While three-quarters of directors still view the rules as a positive, it was far less than the 88 percent who held that belief last year.

No doubt, part of that reticence stems from the SEC pressing for more detailed information on companies’ pay programs. In late August, the SEC sent letters to more than 300 large companies, including General Electric and Coca-Cola, asking for clearer explanations of performance targets and how the different elements of plans work together, among other things. This fall, the agency will release a report providing more guidance on what needs to be provided to investors.

“Taken literally, the CD&A [compensation discussion and analysis] section [of the proxy] can mean the board has to describe in some detail what may really be proprietary,” says Dan Dalton, the director of the Institute for Corporate Governance at Indiana University’s Kelley School of Business. “At the very least, this information can provide an advantage to competitors.”

Bonnie Gwin, a partner at recruiter Heidrick & Struggles who focuses on director searches, agreed that if companies are forced to disclose too much on pay, it’s essentially “giving competitors guidance a couple of years out.”

“In the abstract, transparency is a very good thing,” she added. “But when they see what actually it entails, directors are becoming less enthused.”

Filed by Jeff Nash of Financial Week, a sister publication of Workforce Management. To comment, e-mail

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