Touchy Subject: Institutional Investors on CEO Pay

Asset owners and managers have a lot to say on CEO pay, and it's mostly opposite of corporate stances, according to a recent survey.

(October 10, 2012) — Surprise: Corporations’ and institutional investors’ opinions seriously diverge on CEO compensation, executives serving on board committees, and transparency. 

Institutional Shareholder Services recently published a report on its corporate governance survey of 97 investors (including asset owners and managers) and 273 respondents from debt-issuing corporations. The results: Notably, executive compensation is the top area of concern for both groups, but investors and corporations have different takes on how to improve the situation. 

For instance, 81.3% of investors considered severance settlements for retiring/resigning CEOs problematic, while half the number of corporation respondents felt the same way. Likewise, the immediate acceleration of all unvested stocks upon an executive’s termination bothered 84.4% of investors, but only 44.8% of corporate types. 

Pension funds have been taking an increasingly active stance against excessively (in their view) generous payouts to corporate bosses. The Louisiana Municipal Police Employees Retirement System, for example, is in the midst of suing Simon Property Group’s board, alleging that the shopping-mall giant increased pay for its CEO without obtaining shareholder approval. The police pension accused the company and its board of exceeding its authority by granting its CEO $120 million in equity to stay on until 2019. 

Post-retirement compensation roused more disagreement between the survey respondents than almost any other issue. The vast majority of institutional investors (80.6%)—many of whom were from public pensions—took exception to generous pensions or supplemental executive retirement plans, while only 32.5% of their corporate counterparts found them problematic. 

One area of agreement between the two sets: executives pledging company stock (to use as loan collateral, for example) is a red flag and a bad idea. Just 13.1% of investors are comfortable with the practice, and 20.1% of corporate respondents. Nearly half of those surveyed from each group (49.2% and 45%, respectively) said CEOs should keep their shares off the table, period.

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