Theres evidence that clamping down on CEO pay can backfire. In a 2011 paper Erasmus University Rotterdam finance professor Ingolf Dittmann and two colleagues analyzed some 1,400 U.S. public companies to see how they would respond to limits on compensation. Among the unintended results: higher average payouts.
When Citigroup shareholders recently voted down the banks $15 million compensation plan for CEO Vikram Pandit, they joined the transatlantic chorus against mounting executive pay. Last year in the U.S., the CEOs of Russell 3000 Index companies got a median 15 percent raise and saw their average compensation climb to $5.8 million, according to New Yorkbased corporate governance firm GMI Ratings. So much for austerity. Publicly shaming so-called fat cats may not work, though. Mandatory disclosure of individual pay packages in the U.S. and the U.K. fuels rivalry, says Simon Wong, an executive partner at Governance for Owners, a London-based activist investment shop. If shareholders really want to make a difference, they should help choose a strong board that gets compensation right, Wong maintains: Ideally, it should be tied to strategy, and I dont think shareholders necessarily take the time to understand the linkage between the two.