Controversies over executive pay are tarnishing America's corporate image world-wide, directors and investors have been warned in a hard-hitting new report.
The study by HR consultancy Watson Wyatt Worldwide found that most corporate directors and institutional investors agreed that the U.S. executive pay model has dented corporate America's image.
But they disagreed over whether the model had resulted in improved corporate performance or led to excessive pay levels.
"Despite major reforms, executive pay and corporate governance continue to be a source of controversy," said Ira Kay, global director of compensation consulting at Watson Wyatt, and a leading authority on executive pay.
"While the views of directors and institutional investors on executive pay issues are closely aligned in many areas, we found several differences between the groups, demonstrating that more work is needed on a few key issues."
The survey of 50 directors who served on corporate boards found that eight out of 10 believed the executive pay model had hurt corporate America's image.
A separate Watson Wyatt survey of institutional investors released earlier this year found that 85 per cent thought much the same thing.
Both groups also supported pay that was closely linked to performance and greater disclosure in proxies.
However, some important differences emerged between the two groups.
Two-thirds of directors believed the model had contributed to superior corporate performance, compared with just 22 per cent of institutional investors.
Most institutional investors (90 per cent) felt that executives at most companies were overpaid, and 87 per cent believed executives had too much influence over how their pay was determined.
Directors took a more neutral view, with 61 per cent saying most executives were overpaid, while 48 per cent thought executive pay was too heavily influenced by executives.
"Given the continued controversy over executive pay, it's not surprising that most directors and institutional shareholders agree that greater pay disclosure would be shareholder-friendly," Kay said.
"However, while shareholders may view enhanced disclosure as a way to curb an out-of-control pay system, directors may regard it as a way to demonstrate that the system generally works and to expose potential abuses," she added.
Directors and institutional investors both strongly favoured pay for performance but disagreed over how specific pay elements should be positioned relative to the market.
The vast majority of directors believed that base salary, severance or change-in-control agreements and SERPs should be targeted at the market median.
However, six out of 10 directors favoured targeting long- term incentives above the market.
Most institutional investors (61 per cent) also favoured targeting long-term incentives above the market median but said severance or change-in-control agreements should be positioned below the market median.
"While most directors believe the executive pay system needs further reform, they are unlikely to make dramatic changes to their programmes.
"Given their greater responsibilities in dealing with management regularly and increasing pressure from shareholders and the media, we expect some reform will happen as directors try to find the right balance," argued Kay.
Two-thirds of directors agreed that the executive pay model had yielded high levels of executive stock ownership at most companies.
About three out of four directors believed that the stock ownership guidelines for executives and directors were shareholder-friendly.
Like institutional investors, directors overwhelmingly agreed that stock incentives were shareholder-friendly when they had performance-contingent vesting.
Compared with institutional investors, directors were also more neutral toward severance plans, especially at a change in control – in part because they perceived a tighter market for executives.