NEW YORK, January 16, 2014 — While agreeing that the U.S. executive pay model has improved over the past five years, corporate directors and institutional investors remain divided over several key aspects, including the impact of say-on-pay voting, according to a new survey by global professional services company Towers Watson (NYSE, NASDAQ: TW) and Alliance Advisors, a proxy solicitation firm.

The survey found that most directors (91%) and shareholders (97%) believe the executive pay model has either stayed the same or changed for the better since say-on-pay votes were required. Additionally, the percentage of directors (89%) and investors (59%) who believe executive pay is sensitive to corporate performance has increased by roughly 50% since 2008, when a similar survey was conducted. However, the two groups disagree on several fronts, including the degree of alignment between company performance and strategy, the pay-setting process and whether executive pay levels are too high:

  • Only one in five (20%) directors say the executive pay model in the U.S. has led to excessive CEO pay levels, a sharp drop in the past five years, while nearly three in four (72%) investors say the pay model has led to excessive pay levels.
  • Seven in 10 (70%) directors say the executive pay model at most companies is closely linked to company strategy, compared with just one in three (34%) investors.
  • Less than one-fourth (23%) of directors say executive pay is overly influenced by management, versus two-thirds (66%) of investors.

“Given the strong level of shareholder support for say-on-pay votes the last three years, directors firmly believe they are doing a good job of addressing executive pay issues and that revisions to the executive pay model are generally working well,” said Andrew Goldstein, central  division  leader for executive compensation at Towers Watson. “Investors, however, seem to want an even greater voice in the pay-setting process and also improved communication between companies and shareholders. Despite investors’ views that executive pay is on the right path and their overwhelming support for company pay programs in say-on-pay votes at most companies, it’s clear that they also see considerable room for improvement.”

Directors and Investors Divided on Improving Pay-Setting Process

More than two-thirds of investors (versus just 13% of directors) believe more frequent shareholder engagement would enhance the pay-setting process. More than twice as many investors (84%) as directors (36%) say enhanced pay disclosure would help, as would more restraint in pay setting by boards and management (69% of investors versus 34% of directors.) Interestingly, neither directors nor investors think the Dodd-Frank CEO pay ratio disclosure rule will help improve the model.

“These disconnects may stem from the fact that many investors aren’t fully informed about what goes into the pay decision-making process at many companies,” said Reid Pearson, executive vice president at Alliance Advisors. “It seems clear from the survey responses that both groups of stakeholders feel the U.S. pay model has improved in recent years, but investor perceptions have not caught up with the view in the boardroom. This suggests that companies need to do more to help investors understand the challenges boards face in aligning pay with performance and setting appropriate pay levels, reinforcing the need for greater transparency and engagement.”

The survey also found disparity in how directors and investors view say-on-pay’s impact on shareholder relations. Only one-fourth (26%) of directors believe say-on-pay votes have been a key driver of pay decisions by boards, compared with 63% of investors who feel that way. Seven in 10 directors (72%) believe say on pay has affirmed the alignment of executive pay and company performance, versus only 41% of investors. Finally, directors are more than twice as likely as investors (35% versus 13%) to view say on pay as a waste of time and resources.

There were, however, some noteworthy areas of agreement between directors and major institutional investors. For example, a majority of those surveyed in both groups see the need for more disciplined target setting and for greater consideration of strategic, nonfinancial performance measures in annual and long-term incentives.

“Directors and investors have made great strides in the say-on-pay era to enhance the executive pay model, but more work needs to be done. The good news is that common ground exists on which future alignment can be built, and there are also areas where directors may be well served to pay closer attention to how their decisions on executive pay issues are perceived by the investor community,” said James Kroll, a director at Towers Watson who leads the company’s governance advisory practice for executive compensation.

About the Survey

The survey, Evolving Director and Investor Views of Executive Pay in the Say-on-Pay Era, was conducted in October and November 2013. More than 120 corporate directors and more than 30 institutional investors with combined assets under management exceeding US$12 trillion participated.

About Towers Watson

Towers Watson (NYSE, NASDAQ: TW) is a leading global professional services company that helps organizations improve performance through effective people, risk and financial management. The company offers consulting, technology and solutions in the areas of benefits, talent management, rewards, and risk and capital management. Towers Watson has more than 14,000 associates around the world and is located on the web at

About Alliance Advisors

Alliance Advisors is a shareholder intelligence firm that specializes in proxy solicitation, corporate governance consulting, proxy contests, information agent services and proxy management. Founded in 2005, the firm services more than 350 corporate clients nationwide.