Study: Many Directors Think CEOs Are Overpaid. Will They Fix It?

CEO pay is "too high in most cases," say about one in three directors of U.S.-based public companies in a just-released survey by Heidrick & Struggles International and the Center for Effective Organizations (CEO) at the University of Southern California's Marshall School of Business.

The survey also found widespread unhappiness among directors regarding disclosure rules about executive compensation mandated by the U.S. Securities and Exchange Commission. 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 directors said they doubt the rules are meeting the needs of investors.

This is the 11th year of this study. Among the respondents, 15 percent were internal directors while 85 percent were external. The average annual revenue of participating companies was $6.8 billion.

Approximately three out of 10 respondents (32.2 percent) said 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.

All well and good, I say. But when are directors going to step up and take full responsibility for their actions? It's easy to blame compensation consultants for recommending such high pay packages, but compensation committees should have their own consultants who work only for them. Compensation committees should also have "tally sheets," where they add up all the various dimensions of executive pay. That is an improved practice over the old days when comp committees approved salary, bonus, stock option, retirement and other aspects of compensation at different times during a given year. They lacked a coherent overview of what they were doing.

So if a third of directors think CEOs are overpaid, they have the tools now to fix that problem. And as for the SEC disclosure rules, most companies are loading up their SEC-mandated Compensation Discussion and Analysis statements (CDAs) with hopeless boilerplate. The reason no one can understand them is that the lawyers who write them don't want anyone to understand them. Again, boards have the power to fix that. They can insist on clear statements about why they paid a certain amount of money to a CEO in a given year.

So directors of the world, rise up and unite!