While excessive executive pay levels continue to inflame dissident shareholders and irate citizens, trends indicate that corporate compensation committees increasingly are bowing to shareholder demands by linking pay to performance and disclosing their incentive plans to investors.
"Companies are listening to their [shareholders] concerns by proactively developing more shareholder-friendly pay practices," says Ira Kay, global director of compensation consulting at human capital and financial management consulting company Watson Wyatt. "While not all companies have yet to follow suit, both shareholders and the Securities and Exchange Commission (SEC) can be pleased with the trend."
It's about time, insist public interest groups. The nonprofit Institute for Policy Studies recently reported that top executives make nearly 350 times more than the average American worker. The differential has swollen nearly 10 times in the past 30 years. In 1977, chief executives made 30 to 40 times more than their workers.
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In 2007, CEOs at Standard & Poor's 500 companies made an average of almost $10 million, according to the Corporate Library, an independent research firm devoted to corporate governance issues. CFO salaries weren't as far off the mark: Median compensation at S&P 500 companies registered about $2.9 million, according to executive compensation benchmarking company Equilar.
Corporations may be getting the message. Eighty-seven percent of 75 large, publicly traded companies studied by Watson Wyatt have implemented stock ownership guidelines/requirements, up from 75% a year earlier. Increasingly, time-vested restricted shares are replacing options, notes Paul Hodgson, senior research associate at the Corporate Library.
"When executives are holding a lot of stock, their fortunes rise and fall with investors," explains Andrew Goldstein, North American co-leader of executive compensation consulting at Watson Wyatt. "If shares drop 30%, they have taken as significant a hit."
Corporations also are reining in severance packages, according to Watson Wyatt. About 25% of the companies studied have already–or are considering–revising severance packages so even inept executives don't walk away with multi-million dollar gold handshakes.
Moreover, 68% of the companies disclosed their annual one-year incentive goals in their proxy statements for shareholder consideration, as required by the SEC starting last year, up from 54% in 2007, and 57% disclosed their long-term incentive goals, up from 45% in 2007. Most companies defined success as outperforming their peers in terms of total returns to shareholders.
"Clearly, companies are becoming more sensitive to pay issues," says Goldstein.
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