"While directors and institutional shareholders agree on key executive pay issues, they don't see eye-to-eye on other areas," said Ira Kay, global director of compensation consulting at Watson Wyatt. "While directors believe the system generally works, institutional investors generally feel the model's flaws run deeper and require more substantial changes. Clearly, more work needs to be done."

Nearly two-thirds of directors (63 percent) think the executive pay system is improving compared with just 36 percent of institutional investors, according to Watson Wyatt research. The two groups also diverge on whether the executive pay model has helped to improve company performance. While two of three directors (65 percent) believe it has, only 39 percent of institutional investors feel that way. However, most directors and institutional investors (75 percent) believe 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.

The Watson Wyatt 2008 Report on Directors' and Investors' Views on Executive Pay and Corporate Governance is based on a survey of two groups -- 163 directors who serve on corporate boards of companies that collectively earn $1.5 trillion in annual revenue and 72 investment and pension fund managers who manage more than $5 trillion in assets.

Directors, Institutional Investors Agree and Disagree on U.S. Executive Pay

                                    System

            (Percent of respondents who agree with each statement)

    Overall, the U.S. executive pay     Directors   Institutional
     model at most companies ...                      investors

    Has improved corporate performance     65%          39%
    Is changing in a positive
     direction                             63%          36%
    Has hurt corporate America's image     75%          75%
    Has led to excessive levels of
     executive pay                         61%          86%
    Has created employee resentment        60%          78%

     Numbers are percentage of respondents who agree with each statement.

The study also found 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 percent 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," said Kay.

    Other findings from the study include:
    -- It is difficult to find top talent. Only 6 percent of directors and 14
       percent of institutional investors do not believe firms should
       typically find top executive talent from inside the organization, while
       56 percent of directors and 45 percent of institutional investors
       prefer to promote from within. The rest are neutral.
    -- While nearly half (46 percent) of institutional investors believe that
       executive pay opportunity can be significantly reduced without losing
       key talent, only one-quarter (25 percent) of directors agree.
    -- Both directors (94 percent) and institutional investors (85 percent)
       agree that severance and change-in-control agreements should be set at
       or below market. And even more (96 percent of directors and 90 percent
       of institutional investors) believe the same about perquisites.

Copies of Watson Wyatt's 2008 Report on Directors' and Investors' Views on Executive Pay and Corporate Governance are available at http://www.watsonwyatt.com/boardandinvestors

About Watson Wyatt Worldwide

Watson Wyatt (NYSE, Nasdaq: WW) is the trusted business partner to the world's leading organizations on people and financial issues. The firm's global services include: managing the cost and effectiveness of employee benefit programs; developing attraction, retention and reward strategies; advising pension plan sponsors and other institutions on optimal investment strategies; providing strategic and financial advice to insurance and financial services companies; and delivering related technology, outsourcing and data services. Watson Wyatt has 7,000 associates in 32 countries and is located on the Web at http://www.watsonwyatt.com.

SOURCE Watson Wyatt Worldwide

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