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CEO pay: Shareholders care more than ever

Every year, As You Sow – the leading US non-profit shareholder advocate – identifies the 100 most overpaid CEOs of the S&P 500 and analyses whether or not pension funds and financial managers have held companies accountable for excessive compensation.

In February 2019, As You Sow issued its fifth annual report, The 100 Most Overpaid CEOs: Are Money Managers Asleep at the Wheel?, created in order to bring the problem of excessive CEO pay into focus.

Under provision 951 of the 2010 Dodd-Frank financial reform act, shareholders of US companies were given the right for the first time to vote on compensation as presented in the company’s annual proxy statement for the five named executive officers (NEOs).  The provision grew out of decades of shareholder activism at hundreds of companies, with shareholders demanding disclosure on CEO pay. In the years leading up to the act, shareholder proposals that called for such a vote began receiving majority support. Several companies agreed to voluntarily adopt what some called a say-on-pay policy. Shareholder votes began in 2011 and the first votes covered by our report were from 2013, when how funds were exercising this fiduciary duty was still unclear.

The first year that I authored the CEO pay report, I expected and dreaded hearing from investor relations or other executives, pushing back against the idea that a particular CEO was overpaid. That was not the case. In fact, I only heard from one senior executive, at a company I will not name. He told me, confidentially, that he believed the CEO of his company was unjustifiably overpaid and should have been on our list. I told him that we were only focussing on S&P 500 companies. I left that conversation with a realisation that even highly placed executives outside the C-suite often think CEO pay is excessive.

Now that As You Sow has been releasing the report for five years, there’s a routine to the publication and I can anticipate to some extent what kind of calls and emails I will get from press and investors after the release. There was a new request this year from a fund that voted against a higher proportion of compensation packages than many of its peers. It wondered if it could use a copy of a particular chart in its client presentations. It wanted to advertise how rigorous it was in voting against CEO pay packages.

To me, this was a telling moment about where we are. The issue of overpaid CEOs, inextricably linked to larger concerns about income inequality, has risen to such a high prominence that the votes are something fund customers care about. This is reflected in my own experience. Many of the investors I speak with are continuing to lose patience with CEO compensation, seeing it as a systemic issue and going further to address that.

Because we’ve been compiling this report for several years, we have seen a number of significant findings. We’ve analysed how these firms’ stock prices performed since we originally identified their CEOs as overpaid. We then found that the 10 companies we identified as having the most overpaid CEOs, in aggregate, underperformed the S&P 500 index by an incredible 10.5 percentage points and actually destroyed shareholder value, with a negative 5.7 per cent financial return. We’ve observed that several of the most overpaid companies are in some way insulated in some manner from annual shareholder votes. Companies with triennial votes appear to be awarding mega-grants on years when their shareholders don’t vote, which suggests that they may fear shareholder backlash.

The trend I’m highlighting here is shareholders’ growing dissatisfaction with excessive pay. As You Sow’s research has found there are more funds that have significantly (by more than five per cent) increased their level of opposition than followed the opposite trajectory.

We found 18 funds, each with assets under management (AUM) of more than $90billion that voted against more than 40 per cent of the S&P 500 CEO pay packages. If the threshold of AUM of $1billion is used, there were 87 funds that met the same criteria. Several of these funds have more than doubled the number of CEO pay packages they vote against. The largest US pension fund, California Public Employees’ Retirement System (CalPERS, with assets of more than $350billion) has increased the number of S&P 500 CEO pay packages that it voted against by a factor of almost eight. In 2013, CalPERS opposed only 6.4 per cent of S&P 500 CEO pay packages, last year CalPERS opposed 45 per cent of them.

That increasing level of opposition may come as a surprise to some directors who routinely see levels of support above 90 per cent and think that their shareholders are satisfied with their pay practices. This by no means suggests that shareholders are happy with the quantum and system of CEO pay, but simply that your company may not be an outlier.

While in the aggregate, CEO pay packages still receive a large number of positive shareholder votes, that number is declining. In 2018, it declined to 90.4 per cent – the lowest level since 2012. Large ownership stakes by passive mutual funds that rarely vote against management often mask the true level of shareholder opposition to pay.

In his paper, Asset Manager Stewardship and the Tension Between Fiduciary Duty and Social License, Patrick Jahnke notes that in the past it had been a winning strategy to remain neutral and “kept [large fund managers] out of the limelight and away from regulatory interest, while maximising the potential client base”. However, he believes it is “doubtful that the same strategy will work in the future, now that asset managers have grown to such a size that they have become household names”. As Jahnke notes, “in a democratic capitalist society, failure to maintain the ‘social license’ or perceived legitimacy may result in consumer boycotts and ultimately in calls for stricter regulation”.

We agree with Jahnke and other scholars that the broader and building consensus that CEOs are overpaid may move shareholder investing decisions. Of course, most shareholders have their shares held and voted by a financial intermediary (i.e. mutual funds, ETFs, pension funds, financial managers or people whose full-time job is to watch the companies they invest in and monitor the performance of their boards, their CEOs and their compensation). Increasingly these investors are moving to funds they believe will vote their values.

According to the Forum for Sustainable and Responsible Investments, 26 per cent of professional managed assets – with a value of $12trillion – was invested in funds with
an environmental, social and governance (ESG) component in 2018, an increase of
36 per cent in just two years.

Many institutional shareholders, particularly at funds with significant Canadian or European influence, have led the way in a more broadly based opposition to the systemic issues surrounding CEO pay. Allians Global Investors, with an AUM of $598billion, voted against 75 per cent of the pay packages of S&P 500 companies. A representative told us that the company applies a global corporate governance standard: “In the US, those guidelines are hard on remuneration, because we are taking the view that what is best at incentivising a human being in Europe is probably what is best an incentivising a human being in the US or Asia as well.”

The growing concerns about CEO pay are taking place amid a growing discussion of income inequality. CEO pay has grown an astounding 997 per cent over the past 36 years, greatly outpacing the S&P 500, which has grown only 504 per cent in this time period. Meanwhile, pay for the median worker for many years has remained essentially flat.

In October 2018, the UN Principles for Responsible Investment (UNPRI) published a critical report, Why And How Investors Can Respond To Income Inequality. In the foreword, UN PRI CEO Fiona Reynolds writes: “Institutional investors have increasingly begun to realise that inequality has the potential to negatively impact institutional investors’ portfolios, increase financial and social system level instability; lower output and slow economic growth; and contribute to the rise of nationalistic populism and tendencies toward isolationism and protectionism.”

Shareholders have also become discouraged about some of the false promises of pay for performance. Former CEO Steve Clifford served on a compensation committee and the questions he asked on CEO pay ultimately led him to write the book The CEO Pay Machine: How It Trashes America And How To Stop It.

In the book, he describes ‘the performance delusion’ that corporate boards suffer when rewarding CEOs. Here he notes: “I could observe an evening of roulette and conclude that the best gamblers were rewarded for their performance. How do I know they
were the best gamblers? Easy. They won the most money.” This is essentially what some compensation consultants do in defending a link between pay and performance.

Directors need to ask the hard questions of consultants, executives and themselves. Our discussion with investors and review of guidelines suggest these questions should include:

Is there an overreliance on peer groups? Peer groups, particularly when cherry-picked, are one of the most self-reinforcing aspects of executive pay moving in an upward-ratcheting direction. Do these peers make sense? Does an analysis examine pay within the company as well as outside? Is the same peer group used when determining pay at lower levels of the company? Why was a particular new peer added to the list? (This year, for example, oilfield service company Schlumberger added extremely high paying video streaming company Netflix to its peer group).

Are metrics and targets clearly disclosed and appropriate? Are short-term incentive programmes’ or long-term incentive programmes’ thresholds and maximums sufficiently disclosed? Is there an identifiable limit or cap for each of the different components within the policy?

Are metrics immune from tactical moves that may boost short-term earnings but undermine sustainable growth? Are the metrics muddled by non-GAAP (generally accepted accounting principles) figures? Recent research by MIT’s Robert Pozen, Nicholas Guest, and S.P. Kothari looked into such figures and published an article High Non-GAAP Earnings Predict Abnormally High CEO Pay. Pozen subsequently co-authored with SEC Commissioner Robert Jackson an opinion piece in the Wall Street Journal where they noted: “The SEC’s disclosure rules have not kept pace with changes in compensation practices, so investors cannot easily distinguish between high pay based on good performance and bloated pay justified by accounting gimmicks.” Does the board include accounting experts or hire external ones regarding analysis of non-GAAP figures?


Are there any perverse incentives being created?  At Boeing, executive bonuses were awarded in part on the basis of reaching cost-cutting goals. How was that message conveyed throughout the company? Was it always appropriately coupled with an adequate level of concern about safety?

Are bonuses truly used to reward excellent/stretching behaviour?  How do threshold and targets compare to prior year’s achievements? Is there a discretionary element of payments? Many shareholders vote against discretionary awards as well as any performance requirement that allows vesting when performance is below the median of peers.

Many shareholders have come to view stock options – particularly in this extended bull market – as a windfall based on market movement rather than a suitable reward reflecting individual effort. This is of particular concern when CEO ownership is not growing proportionally as options are exercised, another factor for boards to consider.

The shareholder inclined to vote most diligently are shareholders with long-term horizons  They are particularly concerned with insufficient long-term emphasis and risk mitigation practices. Does the company have long-term incentive plans with performance cycles shorter than three years, which are truly not long-term? Are there adequate clawbacks for variable remuneration that extend beyond accounting statements? Are there sufficient holding period requirements?

Finally, look at pay not just in the C-suite but throughout the company Beginning in 2018, with implementation of a much-delayed provision of the Dodd-Frank Act, companies are required to disclose the pay ratio between the CEO and median employee. While As You Sow did not include pay ratio as a criterion in identifying overpaid CEOs, we did find a predictable correlation between our list of overpaid CEOs and the pay ratio. The median pay ratio for the S&P 500 is 142:1, while the median for companies on As You Sow’s list of the 100 most overpaid CEOs is more than twice as much, namely 300:1. Looking at pay ratio and pay ratio disclosure at the company and its peers is an important new task for directors.


As Bloomberg columnist Nir Kaissar noted in a recent editorial: “As the grim pay disclosures pile up year after year, the backlash against the corporate elite will intensify. If corporate boards can’t find a better balance in their pay structure, outside forces will, and at a potentially far greater cost to companies and their shareholders.”

Ultimately, the real test of say-on-pay is not in the voting, but in reform. The hope is that calling out those that violate corporate governance standards and reasonable pay norms encourages best practices. We believe the increased opposition to pay packages will grow until practices change.


Ethical Boardroom is a premier website dedicated to providing the latest news, insights, and analyses on corporate governance, sustainability, and boardroom practices.

Ethical Boardroom is a premier website dedicated to providing the latest news, insights, and analyses on corporate governance, sustainability, and boardroom practices.


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