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How investors rate executive pay.

How do institutional investors feel about executive compensation? To find out, Georgeson $ Co. conducted a survey of the 500 largest institutional investors. What follow are some of the key findings excerpted from the study.

Institutional investors do not want direct participation in compensation decisions, but they do want greater disclosure of the decisonmaking process and the details of the various compensation programs. They also favor independent compensation committees of the board and compensation programs that are performance-based.


Decisionmaking Process

Institutional investors do not want to vote directly on the compensation of a company's most highly paid executives. Only 29.1% of respondents were in favor of such a procedure, while 58.2% disfavored it and 12.7% were neutral.

Compensation committees of the board were favored by 66"% of the respondents. Sentiment is even stronger that such committees should be truly independent of management: 81.2% of respondents are in favor of the exclusion of officers and "inside" directors, while 67.3% go further by favoring the exclusion of directors who sit on any other board on which an officer or director of the subject company sits.

Institutional investors also are clear in their demand for greater disclosure in proxy statements of executive compensation, particularly concerning stock option and stock appreciation rights plans: 87.3% of respondents favored more-detailed disclosure of such plans, and none disfavored additional disclosure.

Among the factors that respondents noted should be disclosed are performance benchmarks for individual recipients, amount of total equity capital subject to the plans, and the number of unexpired options under all plans.

Respondents were also strongly in favor of disclosure of the present value of options in the year of grant (32.2% strongly favor, 50.0% favor), despite controversy over the method of determining present value.

Compensation and

Corporate Performance

The respondents clearly favor tying compensation to corporate performance, even to the extent of a reduction in overall compensation if performance worsens. 69.7% favor a limitation on compensation based on returns to shareholders through dividends and share value, while 67.3% favor a limitation based on annual profits. Fixed dollar limitations and limitations based upon a multiple of the average employee's salary, however, were not favorably regarded. The respondents do strongly believe, however, that compensation should be reduced if the company's performance worsens (41.8% strongly favor,38.2% favor).

Respondents also believe that equity-based compensation arrangements should reflect current stock performance: 85.5% respondents disfavor options with exercise price below market at the time of grant, while 46.4%, however, favor options with exercise prices above market at the time of grant.

Forms of Compensation

The only specific forms of compensation for which the institutions expressed strong sentiments were incentive and non-qualified stock options and cash bonuses (in favor), and phantom stock plans and stock appreciation rights plans (disfavor). All other forms of compensation in the survey generated a greater neutral response than either a favorable or disfavorable one. (The table on the facing page displays the institutional responses to option plans, stock appreciation rights, and miscellaneous forms of compensation.)


In summary, as corporations review their compensation policies, they should have regard for the issues of particular concern to institutional investors: fuller disclosure of compensation arrangements, especially options; independent compensation committees; relationship of compensation to corporate performance; and the relationship of equity-based compensation to current stock performance.
COPYRIGHT 1992 Directors and Boards
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Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Author:Crozier, Arthur B.
Publication:Directors & Boards
Date:Mar 22, 1992
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