Third of U.S directors think CEO pay is too high

Feb 11 2008 by Nic Paton Print This Article

A third of top executives within America's largest corporations believe pay for chief executives has got out of hand and is now "too high in most cases".

An annual study by executive search firm Heidrick & Struggles International in association with the Center for Effective Organizations at the University of Southern California's Marshall School of Business has found widespread unhappiness about CEO pay among directors.

In particular, directors are unhappy with new disclosure rules governing executive compensation put in Securities and Exchange Commission.

These rules were designed to give investors and corporate watchdogs better, timelier information about pay and other compensation for top executives.

Yet most directors seriously doubt they are meeting the needs of investors, said Heidrick & Struggles.

The poll of 227 directors of U.S. public companies found nine out of 10 thought CEO pay should be no more than two to three times higher than that of the next highest-paid executive.

But, intriguingly, 85 per cent also believed that the difference was about right in their own firm.

The third who believed CEO compensation was "too high in most cases" was a significant increase on the response rate among board members surveyed between 1998 and 2001, when just a quarter felt that way.

Chief executives who responded, perhaps unsurprisingly, were much less likely to believe CEO compensation was too high than non-CEO board members.

Slightly more than half of all those polled indicated that compensation for top executives was "about right except for a few high profile cases".

According to corporate governance body Corporate Library the average chief executive of an S&P 500 company took home $14.8m in total compensation in 2006, up 9.4 per cent on 2005.

"Executive compensation and how that information is disclosed have been controversial for some time," said Ed Lawler, professor of business at the USC and co-author of the study.

"But what this survey unmistakably shows is that the issues are a growing concern even among the people most responsible for dealing with them: the board members of public companies," he added.

As in the 2006 survey, board members polled saw the actions of compensation consulting firms and the creation of new incentive compensation programmes as the main reason for the continuing increase in CEO compensation, said Heidrick & Struggles.

"It is interesting that even though it is boards that determine the level of executive compensation, they still point to the important role consulting firms play," explained Ted Dysart, managing partner, Americas at Heidrick & Struggles' Global Board of Directors Practice.

The company's 2006 poll, published in October of that year, similarly found an increasing number of U.S corporate board directors believing CEO pay was too high.

An overwhelming majority at the time also called for closer links between CEO and performance, though the fact the debate is still raging despite the SEC changes means it is a moot point what, if anything, has changed in reality in the past two years.

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