On CEO Pay, Shareholders Say "Enough!"

The decadent days of out-of-control CEO pay, divorced from actual performance, may be drawing to a close. This proxy season, first Motorola (NYSE: MOT  ) and then Occidental Petroleum (NYSE: OXY  ) lost say-on-pay votes, with the majority of shareholder votes tallied opposing the companies' compensation policies. As more and more shareholders get fed up with excessive executive pay, their vocal displeasure could help change the corporate landscape.

A watchful eye
Say-on-pay policies are non-binding advisory votes; they simply allow shareholders to express their opinion on companies' compensation schemes. A few U.S. companies have voluntarily adopted such policies over the years, and in the wake of the financial crisis, companies that accepted government funds were required to follow suit.

Though they may sound flimsy, evidence suggests that say-on-pay policies could have a tangible impact on their companies' operations. The U.K. has required say-on-pay since 2003. In a 2007 study, the Yale School of Management's Millstein Center for Corporate Governance and Performance showed that although British compensation still rose, the pace was slower, and pay was more closely linked to performance targets. In another welcome side effect, golden parachutes (one of my major pet peeves) also decreased.

A Wall Street Journal article on the topic implies that shareholders' exercise of say-on-pay rights could spur companies and their boards to be more cognizant of investors' opinions and wishes. In addition, I believe that when managers and boards know their shareholders are watchful and engaged, they'll take greater steps to keep pay excesses in check.

Strange but true
Although recent data showed that CEO pay decreased in 2009, this topic isn't cut-and-dried. Some CEOs actually did quite well last year, at least on paper, thanks to options and other stock-based compensation awarded during the market's doldrums. Last year's rally left some corporate leaders with some mind-boggling paper gains.

Yahoo!'s (Nasdaq: YHOO  ) Carol Bartz tops the list in a recent Associated Press analysis of CEO pay. Her 2009 compensation totals $47.2 million, making her the highest-paid CEO last year; 90% of her pay consisted of stock awards and grants.

Bartz's windfall seems a bit strange, given the company's competitive positioning. Yahoo! has fared poorly against a fierce crop of rivals, including Google (Nasdaq: GOOG  ) , Facebook, and AOL (NYSE: AOL  ) . My Foolish colleague Rick Munarriz tracked Yahoo!'s slippage; last year, the company's revenue fell by 10.4%. (Bartz took the helm in January 2009.) Yahoo!'s most recent proxy statement includes a shareholder proposal to institute a say-on-pay policy.

And no discussion of CEO-pay largesse would be complete without Abercrombie & Fitch's (NYSE: ANF  ) Mike Jeffries. He wound up one of the highest-paid CEOs of 2008, despite his company's operational doldrums. Last month, we learned that Abercrombie decided to pay Jeffries $4 million in exchange for limiting his personal use of the corporate jet -- a flagrant abuse of shareholders' money.

Abercrombie's recently filed proxy statement shows that some shareholders have noticed. One shareholder proposal urges the separation of the CEO and Chairman roles (Jeffries currently holds both) to bring on an independent chairman. The proposal notes that The Corporate Library dubbed Jeffries the "Highest Paid Worst Performer" of 2008. Perhaps Abercrombie shareholders will take a cue from Occidental and Motorola, and make their displeasure known with their voting power.

A return to reason
For years, too many mediocre or incompetent chief executives have made too much money. Their cushy salaries didn't just hurt shareholders; at bailed-out firms, their fat paychecks and lousy performance made taxpayers and society at large suffer, too. Let's hope that the growing tide of say-on-pay successes marks an end to the era of entitlement, and a return to rewarding only long-term success.

Say-on-pay votes could make this a pivotal, even historic, proxy season. According to proxy advisory firm RiskMetrics, the Motorola vote marked the first time a U.S. company didn't earn majority support from shareholders during a non-binding vote on compensation. Meanwhile, it appears that Occidental shareholders finally heeded the advice of The Corporate Library, which dubbed the company a "serial overcompensator." In another recent victory for corporate governance fans, PNC Financial (NYSE: PNC  ) shareholders passed an advisory vote to trim the size of golden parachutes at that firm.

In the long run, shareholders' acknowledgment of pay policy problems, and their vocal outcry when those practices defy common sense, will result in better-built companies, happier investors, and less overall risk.

Check Fool.com next Wednesday for Alyce Lomax's latest column on corporate governance.

Google is a Motley Fool Rule Breakers selection. Try any of our Foolish newsletters free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.


Read/Post Comments (9) | Recommend This Article (32)

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  • Report this Comment On May 12, 2010, at 5:09 PM, margot5664 wrote:

    re: CEO pay

    I am so annoyed with Jamie Dimon who gets a jimendous salary + bonus et cetera and they cut the JPM dividend by 75%. Totally unfair!

    thank you and good day.

  • Report this Comment On May 12, 2010, at 7:53 PM, bs1934 wrote:

    Who casts the majority of votes. Would I be remiss in saying it is the funds? Those guys aren't exactly underpaid. Perhaps they have sensed the tide changing and feel they had better get aboard the ship of public opinion. The funds, before they cast their votes, should be required to pole the real stockholders for their opinions and vote accordingly.

  • Report this Comment On May 13, 2010, at 8:38 AM, Global10 wrote:

    When is the working class going to recieve there fair share. Heck they do all the work and the CEO and friends laugh all the way to the bank.

  • Report this Comment On May 13, 2010, at 10:13 AM, LiveOakGrey wrote:

    Alice,

    Another excellent article! Very insightful focus that the abuses perpetrated by management not only harms shareholders, but the taxpayers bailing these chumps out (and the stability and success of our society at large).

    bs1934

    I've wondered off an on about some method to force funds to give votes restricting compensation and excessive pay to underperforming managers, when the funds are themselves run by the same personality types, that hide their own overcompensation amongst the 'everyone else is doing it' - excuse. These fund managers (and other company managers) don't have their interests aligned with shareholders, rather their interests are aligned with... each other's. They each scratch each other's back as a matter of principle.

    Your comment that fund management voting on compensation for stocks they hold, should be required to take a vote/poll of their actual shareholders, to determine how their fund votes as a whole, is a simple and elegant solution to much of the problem.

  • Report this Comment On May 13, 2010, at 10:18 AM, LiveOakGrey wrote:

    Alyce,

    Another excellent article! Very insightful focus that the abuses perpetrated by management not only harms shareholders, but the taxpayers bailing these chumps out (and the stability and success of our society at large).

    bs1934

    I've wondered off an on about some method to force funds to give votes restricting compensation and excessive pay to underperforming managers, when the funds are themselves run by the same personality types, that hide their own overcompensation amongst the 'everyone else is doing it' - excuse. These fund managers (and other company managers) don't have their interests aligned with shareholders, rather their interests are aligned with... each other's. They each scratch each other's back as a matter of principle.

    Your comment that fund management voting on compensation for stocks they hold, should be required to take a vote/poll of their actual shareholders, to determine how their fund votes as a whole, is a simple and elegant solution to much of the problem.

  • Report this Comment On May 13, 2010, at 10:20 AM, LiveOakGrey wrote:

    Hmmm,

    Sorry for the typo on spelling Alyce/Alice.

    This comment box needs to go back to the older format where you could edit the entire comment by looking at it on it's own page, where you could see more than a teensy box holding only one paragraph at a time. The old editing system was better, and this isn't an improvement!

  • Report this Comment On May 13, 2010, at 11:40 AM, jrj90620 wrote:

    It's all those options they hand out to management and directors that bother me.One company I own stock in recently gave out almost a million options to directors and management.Will be selling that one.

  • Report this Comment On May 14, 2010, at 11:11 AM, nogrthinker wrote:

    One common thread seems to run through this article, along with other common threads. The one I am talking about is: SIZE. Many, if not most, of the companies paying the bloated salaries, giving huge stock options, and offering 'Golden Parachutes' (which I don't think should exist at all), have grown to a size larger than that indicated by efficiency or competitiveness. They no longer have the founder's motivating force and vision, and are very likely to be run by people mostly interested in themselves (their salary, golden parachute, stock options). At this size, they can control mutual fund votes, buy congressmen, and ignore the INDIVIDUALS who are shareholders.

    FAILING is a fact of life. it's one of the things that keeps the collective US healthy. From the individual, to corporations, to governments, an entity can grow SO large, that it must fail (or die, if a biological organism). We individuals who make up the smallest components of these other monstrosities, must remain ever vigilant that the various bodies of which we are a part, don't become bloated and die. When we see one of these bloated organizations dying, the LAST thing we should think is: It is too big to fail. That would require an even bigger (maybe also bloated) savior. This savior could be US (two meanings there).

  • Report this Comment On May 17, 2010, at 1:29 AM, radicalaccountin wrote:

    I have a question about CEO pay?

    I'm using Yahoo to research aluminum stocks, and Century (CENX) has much higher CEO pay than Kaiser (KALU).

    But wouldn't how CEO's are paid with stock options part of the compensation deal? How do I tell how much they are paid in that way? I can look at insider trading, but it's hard to follow. I don't see how to see if they were given some kind of lucrative deal as part of their pay, or was it normal stock options that are given to all officers? Thanks!

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