A recent Watson Wyatt Worldwide survey of 55 institutional investors managing a total of $800 billion in assets shows that 90 percent of investors think that executives are overpaid. Sixty-four percent say that executive compensation is not properly disclosed.

Specifically, these investors, many of which are pension funds, want companies to better link executive pay with company performance, says Ira Kay, global director of Watson Wyatt’s compensation practice.

To address the issue, Rep. Barney Frank, D-Massachusetts, in November introduced the Protection Against Executive Compensation Abuse Act, which includes a requirement that contingency pay, such as severance, be subject to shareholder vote.

Increased focus on the issue comes in the wake of last year’s findings by the SEC that a number of companies, most notably General Electric and Tyson Foods, were giving their CEOs millions of dollars in undisclosed perquisites, such as the use of company jets. Christopher Cox, the new head of the SEC, wants companies to highlight such details, which currently are buried in footnotes in company proxies.

"This is going to be a year of major confrontation between companies and investors if they do not take steps to reform their executive compensation processes," says Patrick McGurn, executive vice president of Institutional Shareholder Services, a Rockville, Maryland, company that advises institutional investors on how to vote on their proxies. He predicts that this year more institutional investors will vote in favor of pay-for-performance packages for top executives.

Some companies, like Coca-Cola, are already succumbing to shareholder pressure. In October, the company adopted a new policy that requires shareholder approval of future executive severance agreements that amount to more than 2.99 times the executive’s salary and bonus. The company made the move after one of its shareholders, the International Brotherhood of Teamsters General Fund, proposed the rule and received 41 percent approval from other shareholders.

The trick for companies and their boards is balancing the demands of investors and regulators with the need to retain top talent, says Jill Saverie, director of compensation at Priceline in Norwalk, Connecticut.

"You see these companies that have become revolving doors for their senior executives," she says. "If people don’t think that turnover affects the bottom line, they are lying to themselves." Last year Priceline lost its COO, Mitch Truwit, to Cendant Corp.

Companies’ concern about turnover is understandable, given that 10 percent to 15 percent of top executives leave for another company each year, Kay says.

For example, Kay says one company he recently spoke to that has just recovered from a financial slump told him that it will do what it can to retain its CEO, but given the competition for talent there is only so much it can do. "They know that if their stock price doubles, there will be nothing they can do to keep this person."

—Jessica Marquez