Survey: Time to trim CEO salaries

USC (US)—A recent survey shows most corporate board members believe parts of CEO pay packages need trimming and nearly half say the amount of CEO total compensation should decrease.

Ed Lawler, the study’s author and director of the Center for Effective Organizations at the University of Southern California, says board members particularly pointed to reductions in benefits and perquisites such as corporate jet rides as well as severance and retirement plans.

The annual survey suggests a significant shift since 2006. Most corporate directors are now saying there should be decreases in benefits and perquisites (59 percent), retirement packages (52 percent), and severance pay for CEOs (73 percent), whereas in 2006 these opinions were held by only a minority.

In addition to agreeing perks and parachutes should be reduced, directors and some congressional leaders strongly support tying executive pay to company performance.

The survey also reveals that corporate directors oppose congressional attempts to regulate CEO salaries because the proposals would harm, not help, the effectiveness of executive pay programs.

The survey of 140 corporate directors at U.S. publicly traded companies was conducted in August. For the first time since it launched in 1998, the annual survey asked directors about proposed legislative reforms. Results show:

  • 58 percent oppose mandatory shareholder approval of all executive compensation programs because it would greatly or moderately decrease the effectiveness of pay plans;
  • 49 percent say President Obama’s initiative to impose advisory shareholder votes on all executive compensation would moderately or greatly hurt the effectiveness of the plans. Meanwhile, 37.5 percent say Obama’s plan wouldn’t change anything. The remainder, only 13 percent, say the president’s idea would moderately or greatly increase the plans’ effectiveness;
  • government-imposed limits on executive pay are overwhelmingly rejected by directors: 70.9 percent indicate it would cause a “great decrease” in the effectiveness of compensation programs, and 14.2 percent predict a “moderate decrease.” Only 2.4 percent say it would be a moderate improvement and only 0.8 percent say it would be a great improvement. The remainder, 11.8 percent, say it would lead to no change.

Proposed congressional limits on CEO compensation are unpopular with directors, notes Lawler, adding that many board members work as top executives at other companies so any decrease could negatively impact compensation in their “day job.”  In addition, he says, “it would be a big move toward government controlling private enterprises.”

The private sector, not Congress, should correct the problems with CEO compensation, board members indicate in the survey.

The study also finds that corporate board members believe exorbitant CEO salaries exist in other companies, not their own, Lawler adds. As a result, boards may not change their company’s executive pay plans. “Directors increasingly think there is a problem with executive compensation, but that may not lead to change because they think it is the other organizations that need to change.”

Executive compensation keeps going up, the issue at this point is, Lawler asks, are the boards going to change it? “Is the government going to mandate change? Or is there going to be no change, which has been the history,” Lawler says. “After a storm of public outrage passes, it’s always been back to business as usual.”

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