This content is from: Portfolio

Investors May Need a New Approach to Curbing Executive Pay

Last year the CEOs of Russell 3000 companies saw their average compensation hit $5.8 million — a 15 percent median increase over 2010. But in the U.S. and elsewhere, efforts to reduce executive pay packages by publicly shaming so-called fat cats may get the opposite result.

When Citigroup shareholders recently voted down the bank’s $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 York–based 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 don’t think shareholders necessarily take the time to understand the linkage between the two.”

There’s 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.  •  •

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