Upfront: Boards' Concern Over CEO Pay Mounts

The Sarbanes-Oxley Act and the legislation that followed focused business leaders' urgent attention on matters of corporate governance. CEO compensation, one key area of governance, is being scrutinized by regulators, shareholders, academics, journalists and watchdogs of every stripe. And board members are feeling the sting of public criticism over executive compensation, according to a study of U.S. board directors conducted by Heidrick & Struggles International Inc., a Chicago-based executive search and leadership consulting firm, and the Center for Effective Organizations at the University of Southern California's Marshall School of Business. "Today's directors face public criticism over executive compensation and must comply with strict governance reforms, making their work more challenging and possibly less fulfilling," observes Theodore L. Dysart, managing partner of Heidrick & Struggles' global board of directors practice.

Nearly 40 percent of respondents surveyed believe that CEO pay is too high in most cases, up from 25 percent in years 1998 through 2001. This is three times the percentage who think CEO compensation is generally in line with CEO performance, competitive conditions and good economics. Not surprisingly, outside directors are more likely to feel that CEO pay is too high than are inside directors.

Eighty-one percent of board members say they favor strengthening the link between CEO pay and performance. However, when asked about the effectiveness of the compensation program for their own company's CEO, only 24 percent indicate some change is needed.