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A survey by the USC Marshall School of Business shows that most corporate board members believe parts of CEO pay packages need trimming, particularly in benefits and perquisites such as corporate jet rides as well as severance and retirement plans, said Professor Ed Lawler, the study’s author and director of Marshall School’s Center for Effective Organizations.
Roughly 47 percent of directors say the amount of CEO total compensation should decrease, the survey found.
Meanwhile, directors showed a significant shift since 2006 in what should be decreased: Most 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 (23 percent, 25 percent and 32 percent).
In addition to agreeing perks and parachutes should be reduced, directors and some congressional leaders strongly support tying executive pay to company performance.
• 71.4 percent of directors said tying pay closer to company performance would be a great or moderate improvement;
• 62.5 percent said tying pay closer to the performance of individual executives would have a great or moderate increase in the efficacy of CEO compensation plans.
But the annual Marshall Center for Effective Organizations 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. It found:
• 58 percent opposed mandatory shareholder approval of all executive compensation programs because it would greatly or moderately decrease the effectiveness of pay plans;
• 49 percent said 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 said Obama’s plan wouldn’t change anything. The remainder, only 13 percent, said the president’s idea would moderately or greatly increase the plans’ effectiveness;
• Government-imposed limits on executive pay were overwhelmingly rejected by directors: 70.9 percent said it would cause a “great decrease” in the effectiveness of compensation programs, and 14.2 percent predicted a “moderate decrease.” Only 2.4 percent said it would be a moderate improvement and only 0.8 percent said it would be a great improvement. The remainder, 11.8 percent, said it would lead to no change.
Proposed congressional limits on CEO compensation are unpopular with directors, said 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 said, “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 indicated in the survey.
The study also found that corporate board members believe exorbitant CEO salaries exist in other companies, not their own, Lawler said. 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,” Lawler said.
Directors’ belief that excessive pay is another company’s problem, not their own, is reflected in these findings:
• 86 percent said their own company’s CEO pay plans are “effective” or “very effective.” These results align closely with 2007 survey results, before the 2008 market meltdown;
• But speaking about executive pay in general, 35 percent said it was too high in most cases, an increase of 10 percentage points since 1998. Additionally, 56 percent said it was about right except for a few high-profile cases.
“Executive compensation keeps going up, the issue at this point is, 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 said. “After a storm of public outrage passes, it’s always been back to business as usual.”