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Executive Pay Disclosure Needs Improvement

While corporate directors and institutional investors disagree over whether the U.S. executive pay model is improving, both groups concur that the current model has tarnished corporate America’s image. According to a recent study by Watson Wyatt Worldwide, a global consulting firm, 63% of directors believe the executive pay system is in fact improving as compared to just 36% of institutional investors. The two groups also diverge on whether the executive pay model has helped to improve company performance. While 65% of directors claim it has, only 39% of institutional investors believe this is true. However, 75% of directors and institutional investors deem the executive pay model has hurt corporate America’s image. A majority of both groups also believe the system has led to resentment among the rank and file and has resulted in excessive executive pay levels. Additional findings of the Watson Wyatt 2008 Report on Directors’ and Investors’ Views on Executive Pay and Corporate Governance also suggests that both directors and institutional investors believe the Securities and Exchange Commission’s new disclosure requirements have been helpful, although improvements are still needed. For example, more than 80% of institutional investors and nearly three-fourths of directors feel the new Compensation Disclosure and Analysis sections in companies’ proxy statements improve pay disclosure and transparency. While most directors and institutional investors believe the new disclosure rules will be helpful to shareholders, neither group thinks they will have much impact on executive pay levels. “Enhanced disclosure is likely to come into focus over the next several weeks as companies begin to release their proxy statements. Directors will be in a strong position to use these disclosures as a way to convince institutional investors the pay model is working, particularly if they are able to negotiate shareholder-friendly changes to their executive compensation programs,” says Ira Kay, global director of compensation consulting at Watson Wyatt Worldwide.