Press Releases

Major Investors Critical of CEO Pay and Disclosure
Option Expensing Favored, but New Governance Mandates Viewed as Too Costly

New York, April 29, 2005 - They say chief executives of major U.S. companies are overpaid. They think golden parachutes serve no useful corporate purpose. They want Directors held personally liable for the worst financial scandals on their watch.

So say 88 major institutional investors in a recent survey on executive pay and corporate governance issues conducted by executive compensation consultants Pearl Meyer & Partners. The investment managers also expressed widespread dissatisfaction with both the state of governance in Corporate America and the cost to shareholders of compliance with Sarbanes-Oxley and other recent reforms.

Among the specific opinions expressed by respondents to a March survey sent to selected investors with median assets under management of $36 billion:

• 75% say average CEO pay of $10.5 million at major companies is too high.
• 59% are opposed to golden parachute arrangements.
• 98% say Directors should be accountable for certain financial irregularities that occur on their watch.
• 60% rate earnings per share - one of the most widely used criterion for determining executive bonuses - among the least useful barometers of company and CEO performance.

Echoing the views of many governance critics, the size of chief executive pay packages drew the most fire. Three-quarters of respondents said current compensation for chief executives is too high and not one thought CEOs are underpaid.

Investors also were dismissive of the widespread use of golden parachutes, or contractual arrangements that provide executives with financial protection in the event of a takeover. Viewed by the majority of fund managers as "an inappropriate personal incentive to management to take financial risks," more than one investor dubbed such payments "a reward for failure."

In line with their own interests, 65% rated shareholder return as the first or second most important factor in setting CEO bonus and long-term incentive payments, followed by return on capital at 53%. Earnings per share, a frequently-used performance yardstick, was ranked last in importance.

Costs vs. Benefits of New Governance Mandates
Investors are largely unimpressed by recent regulations, with one respondent calling Sarbanes-Oxley "an outrageous overreaction to some bad apples." Of six key SOX provisions, only two were rated worth the cost of compliance by a majority of respondents: real-time disclosure of insider trading and the certification of financial reports by CEO/CFO, at 58% and 53% respectively.

Wall Street Eyes Directors
Board pay drew less criticism, with respondents about evenly split whether current average Director pay of $177,000 at major companies is too high or about right. There was more consensus about the need for Board accountability, with all but a handful of respondents saying Directors should be personally liable for at least some serious financial or compensation irregularities on their watch. The majority thought personal accountability should be limited to "gross lack of oversight," while another 23% favored a standard of "malfeasance" and 17% said Directors should always be held personally liable.

In related questions, investors by a two-to one-margin favored proposals to allow easier shareholder nomination of Directors. When it comes to casting their proxy ballots, fully 97% of respondents rely on their firm's voting guidelines, with three-quarters applying them strictly or with only rare exceptions.

Dilution on Their Minds
Significantly, dilution proved to be a most popular investment criterion - as well as the area most often cited for insufficient disclosure. Nearly 80% of respondents regularly consider dilution in making their buy/sell decisions, followed by executive stock ownership and corporate governance, both cited by about 65%. Better disclosure of dilution was called for by 69% of respondents, followed by 64% who wanted more information on equity pay practices and about half who would like improved reporting of executive pay levels and aof executive stock ownership.

Option Expensing Gets High Marks
Investors strongly approve of mandatory option expensing, with 73% saying the cost of option use will be a "significant" factor in their investment decisions. A total of 58% predicted that accounting for option use will result in improved profit-loss statements, which was similar to the proportion of respondents who expressed satisfaction with existing valuation methodologies.

The Pearl Meyer & Partners survey conducted in March queried professional money managers of equity mutual funds and institutional accounts at investment firms with a median of $36 billion under management. Eighty-eight managers from across the U.S. responded with their views on executive and Board compensation, corporate governance and regulatory issues.

About Pearl Meyer & Partners
Founded in 1989, Pearl Meyer & Partners is recognized for its counsel to Board Compensation Committees and senior managements. The firm specializes in the evaluation, design, development and implementation of compensation programs for executives, employees and Boards, as well as issues related to corporate governance. Services also include customized marketplace surveys, organizational development and sales incentives, all supported by strong actuarial and benefits expertise. Headquartered in New York, Pearl Meyer & Partners maintains offices in Atlanta, Boston, Charlotte, Chicago, Houston and Los Angeles.

Pearl Meyer & Partners is a practice of Clark Consulting (NYSE: CLK), a leading publicly traded firm in its field, serving more than 3,800 U.S. companies nationwide with comprehensive advice on the design, financing and administration of compensation and benefit programs.

Back to top