Directors Willing to Sacrifice Shareholder Value Over CEO Pay

More than half of corporate directors (67%) say they would sacrifice shareholder value to avoid conflict or “controversy” regarding pay for CEOs.

The strongest limitation on setting CEO pay is “the need to obtain investor support,” as 77% of directors believe “constraints have forced them to offer a lower level of pay” to CEOs. Other limitations to CEO compensation can originate from stakeholder groups including proxy advisers, employees and customers.

These findings are from a study conducted by the London Business School. Surveys conducted at the end of 2020 with 203 non-executive directors of the Financial Times Stock Exchange (FTSE) All-Share companies and 159 institutional investors in the U.K. asked respondents about CEO compensation. The study’s overarching goal was to achieve a clearer understanding of the objectives, constraints and determinants of CEO pay.

When directors were asked to rank the factors of CEO pay from most to least important, 65% believed “attracting the right CEO” was the most important, while 34% indicated that “designing a structure that motivates the CEO” was the most critical. About 1% of directors said keeping salary down was a key factor. These findings highlight that company fit and motivating a CEO are much more important to directors than lowering compensation just to prevent conflict. By implementing a system that rewards the executive for being intrinsically motivated, it ensures company growth and shareholder value that is not related to financial incentive.

The survey further concluded that “respondents view intrinsic motivation and reputation as stronger motivators than incentive pay,” conveying that even if a CEO’s salary is lowered, it may not trigger any negative impacts.

Of the directors surveyed, 77% were forced to offer lower pay to their CEOs. From this initial amount, 41% reported no adverse effects, while only 7% of directors indicated that their CEOs left. However, 42% reported that the CEO was less motivated. This indicates that while financial incentive is not the most important factor when determining CEO compensation, it must be accounted for.

Source: “CEO Compensation: Evidence From the Field,” Alex Edmans, Tom Gosling, Dirk Jenter; London Business School, Centre for Economic Policy Research, July 2021.