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Most CEOs Overpaid, One in Three Company Directors Say
 

By Stephen Miller  2/26/2008

CEO pay is "too high in most cases," say about one in three directors serving on the boards of U.S.-based public companies, according to the 11th survey on CEO compensation by executive search firm Heidrick & Struggles International and the Center for Effective Organizations at the University of Southern California's Marshall School of Business. The findings were released in February 2008.

Nearly a third (32.2 percent) of board members thought that CEO compensation is "too high in most cases." This represents a significant increase over the response of board members in the years from 1998 through 2001 when just 25 percent of board members thought it was too high.

Just more than half (51.8 percent) of all board members, however, indicated that compensation for top executives is "about right except for a few high-profile cases."

And when it comes to CEO pay vs. compensation for other executives, nine out of 10 corporate directors thought CEO pay should be no more than two to three times higher than the next highest paid executive, according to the annual survey. Some 85 percent believe that the difference is about right in their own firm today.

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CEO pay should not be more than two to three times that of
the next highest paid executive, most board members say.
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Fingers Pointed at Comp Consultants

As in the 2006 survey, board members see the actions of compensation consulting firms and the creation of new incentive compensation programs as the major reason for the continuing increase in CEO compensation.

"It is interesting that even though it is boards that determine the level of executive compensation, they still point to the important role consulting firms play," says Ted Dysart, managing partner, Americas, for Heidrick & Struggles' global board of directors practice.

Dissatisfied with Disclosure Rules

The survey also found widespread unhappiness among directors regarding disclosure rules for executive compensation mandated by the U.S. Securities and Exchange Commission (SEC). The rules were unveiled with great fanfare to give investors and corporate watchdogs better, timelier information about pay and other compensation for top executives. Despite those intentions, most board members said they doubted the rules are meeting the needs of investors. Specifically:

  • Only 11.6 percent of directors agreed—to a "great" or "very great" extent—that SEC-mandated executive compensation information reported in proxy statements was easily understood.
  • Only one in 10 directors believed this information did a good job of explaining how compensation decisions are made.
  • While there is broad agreement that companies should continue reporting executive compensation information according to current mandated SEC regulations, only 11.2 percent agreed that this information served investors well.
  • Fewer than three out of 10 directors (27.8 percent) agreed that the proxy statements provide valuable information about the amount of executive compensation.

"Executive compensation and how that information is disclosed have been controversial for some time. But what this survey unmistakably shows is that the issues are a growing concern even among the people most responsible for dealing with them: the board members of public companies," says Ed Lawler, CEO director and a distinguished professor of business at the Marshall School of Business.

"While more disclosure is generally viewed as a good thing," he adds, "most board members find that what is made available today is difficult to understand, lacking in context and generally not effective for informing investors and other company stakeholders."

Stephen Miller is manager of SHRM Online’s Compensation & Benefits Focus Area.

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