WASHINGTON, December 13, 2005 - Institutional investors are strongly at
odds with the way many U.S. companies determine executive pay packages,
according to a new study by Watson Wyatt Worldwide, a human capital
consulting firm. Most believe there should be a stronger link between
compensation and performance.
The survey of 55 institutions, managing a total of $800 billion in assets,
shows that 90 percent of institutional investors think the current
executive compensation system has overpaid executives, and 85 percent say
it has hurt corporate America´s image. Additionally, nearly two-thirds (64
percent) say executive compensation is not disclosed properly.
"Companies should take these findings seriously," said Ira Kay, global
director of Watson Wyatt´s compensation practice. "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 also noted that institutional investors own about 60
percent of major corporations.
While institutional investors find fault with aspects of the current
system, most have favorable views of stock incentives based on performance.
For instance, roughly a third favor stock options or restricted stock that
vests simply over time, but a majority support offering stock options or
restricted stock that vests based on performance (favored by 65 percent and
70 percent, respectively).
Additionally, a majority of institutional investors (52 percent) think that
the U.S. executive pay model has yielded high levels of executive stock
ownership. Watson Wyatt research has consistently shown that companies with
high levels of CEO share ownership financially outperform those with low
levels.
Kay said companies should address investors´ concerns by considering a wide
variety of actions, including limiting and fully disclosing perquisites,
increasing the amount of executive pay based on performance and capping
severance and change-in-control plans at the industry standard or less.
"Companies need to find the right balance between satisfying investors and
recruiting and retaining the best executives," Kay said. "While that can be
tricky, boards need to undertake the effort. It´s far better than
continuing to risk public criticism, which could ultimately lead regulators
to impose a one-size-fits-all solution."
Other key findings from the survey include:
Total Returns to Shareholders was the metric most often cited as an
appropriate performance benchmark - 38 percent mentioned it as the most
important metric, while 62 percent cited it as one of the top three.
A majority (60 percent) of investors believe that requiring executives to
hold shares after option exercise or vesting is shareholder friendly.
Two out of three investors (67 percent) favor having independent
consultants report to the compensation committee, where for most investors,
"independent" means that the consultant does not give management executive
compensation advice.
About Watson Wyatt
Watson Wyatt Worldwide (NYSE:WW) is a global human capital and financial
management consulting firm. The firm specializes in employee benefits,
human capital strategies, technology solutions, and insurance and financial
services and has 6,000 associates in 30 countries. The firm is located on
the Web at www.watsonwyatt.com.
Contact
Ed Emerman, (609) 452-5967, eemerman[at]eaglepr.com
Emily Rieger, (703) 258-7634, emily.rieger[at]watsonwyatt.com