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Corporate Counsel News - Trends and Developments,Towers Watson survey finds directors, investors disagree on executive pay issue

Amy Leisinger, J.D.
POSTED 2014-01-22

By Corporate directors and institutional investors agree that the U.S. executive-pay model has improved over the last several years but remain divided on certain issues, including the potential impact of say-on-pay voting and improving the pay-setting process, according to a recent survey by Towers Watson, a global professional services firm, and Alliance Advisors, a proxy solicitation firm.

EXECUTIVE PAY. Specifically, the survey found that 91 percent of directors and 97 percent of shareholders believe that the executive-pay model has maintained status quo or improved since the implementation of say-on-pay voting. However, directors and institutional investors disagree on whether performance and strategy are properly aligned, whether pay-setting processes are adequate, and whether, in general, pay levels for executives are too high. Seventy percent of the directors surveyed say that executive pay is closely linked with strategy, compared with just one in three investors. In addition, only a small number of directors find that executive pay is overly influenced by management, compared with 66 percent of investors. The survey also found that the vast majority of directors do not believe that the executive-pay model has led to excessive compensation, versus nearly three-fourths of investors disagreeing.

"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. Investors, however, seem to want an even greater voice in the pay-setting process and also improved communication between companies and shareholders," said Andrew Goldstein, central division leader for executive compensation at Towers Watson.

IMPROVEMENTS TO PAY-SETTING PROCESS. The vast majority of investors surveyed believe that more frequent shareholder engagement, enhanced pay disclosure, and management restraint would enhance the pay-setting process; the directors polled disagree. However, both parties concur in the belief that the Dodd-Frank CEO pay-ratio disclosure rule will not markedly help improve the model and have concluded that more disciplined target setting and additional consideration of nonfinancial performance measures are necessary.

The survey also discovered a disparity between how corporate directors and institutional investors view the actual impact of the say-on-pay requirements. The majority of directors do not believe say-on-pay votes drive pay decisions, but nevertheless they demonstrate the alignment of executive pay and company performance. According to the survey, 35 percent of directors view say-on-pay as "a waste of time and resources."

"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," said James Kroll, a director at Towers Watson who leads the company's governance advisory practice for executive compensation.


An Adversarial Pursuit
Litigation is an adversarial pursuit. Corporations pay millions of dollars each year to inside and outside counsel to protect their interests with absolute toughness and legal precision. They pay them to win.

Without strong guidance and communication from top leadership, however, a company's drive to prevail in legal disputes against other companies can easily translate into endless, costly, and mutually destructive conflicts in which the original goal (e.g., some important, tangible business objective) becomes lost in the fog of war.

CEOs cannot micromanage every legal maneuver. What they can and must do is make sure that their long-term objectives are clearly articulated and understood by their in-house counsel, hired attorneys, and any of their managers or employees involved in the case. In the best situation, they will also make their objectives known to their opponent and do their best to understand their objectives, for frequently the success of both sides is inextricably linked.

"An attitude set by the corporate leadership that is gladiatorial, with disdain for adversaries, will naturally tend to filter into the litigation and arbitration hearing room," says Walter Gans, a former corporate general counsel and currently a leading arbitration judge. An aggressive corporate culture may serve some purposes very well, but leaders of such companies must be especially adept at channeling it properly.

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