The pay packages of US chief executives are rising faster than corporate earnings and shareholder returns in a sign that corporate America is failing to link executive compensation to performance, a Financial Times study has found.

The results of the survey, which looked at total compensation of chief executives of companies in the S&P 500 index over the past two years, will add weight to calls by corporate governance activists for more shareholder and board oversight of executive pay.

However, the study, carried out for the FT by Reuters Estimates, also suggests that America’s corporate leaders are becoming more restrained in their pay demands, moving away from the huge pay packages of the recent past.

The median pay package of US chief executives, which consists of salary, bonus, options exercised during the period and other long-term compensation, rose 20 per cent to about $5m in the last fiscal year.

By contrast, net profits at their companies increased by an average of 15 per cent, and total shareholder returns, calculated by combining share price movements and dividends, rose by only 9 per cent.

After decades during which the wages of average Americans have failed to keep pace with the sharp rises in chief executives’ pay, shareholders in US companies have become more vocal about executive compensation.

Their interest has been heightened by a string of corporate scandals involving highly-paid executives, including the current regulatory probes into the backdating of stock options at over 100 companies.
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Carol Bowie, director of the governance research service at Institutional Shareholder Services, which advises some 1,600 fund managers, said the survey showed that corporate boards should do more to link pay to performance. "This seemingly upward spiral in executive compensation is of great concern to shareholders," she said.

However, corporate leaders said the relatively small gap between the rate of increase in executive compensation and the rise in companies’ earnings showed executives’ compensation was fair.

John Castellani, president of the Business Roundtable, which represents the chief executives of 160 of the largest US companies, said: "This report demonstrates that the board process of determining executive compensation is working to ensure that compensation reflects companies’ performance and results."

However, corporate governance experts argue that the rate of growth and absolute levels of executive pay are still dwarfing those of the average worker.

"Why shouldn’t the employees get the same increases in pay? After all they create earnings growth too, " said Charles Elson, director of the Weinberg Center for corporate governance at the University of Delaware. "The reality is that this is a false market driven not by appreciation in the share price and earnings but by what other chief executives are getting".