Stop Enabling Crazy CEO Pay

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Last year, CEOs at the biggest American companies made better money than they did in 2007, despite the intervening economic havoc. Why did executives enjoy such a cushy payday? Because their biggest shareholders did nothing to stop it.

According to executive compensation research firm Equilar, the typical CEO made $9 million in 2010, a 24% increase over last year. In 2007, before the housing bubble burst and the financial crisis hit, the median pay for CEOs was $8.4 million. Although CEO pay did clock two years of declines, major CEOs have apparently quickly regained lost ground in pay levels.

Sadly, they seem to be among the few groups of individuals who have regained much at all in the last couple of years. While some of these CEOs undoubtedly deserve pay hikes for great performance, many don't.

Who are the biggest enablers?
To a certain extent, we investors can blame ourselves for this pay-performance disconnect. Outsized CEO pay triggers less outrage when the economy's humming along nicely, and most investors have historically zoned out on this issue in general. Perhaps it's time we all started paying more attention.

However, the biggest enablers of disproportionate pay may also be these companies' biggest shareholders. The American Federation of State, County, and Municipal Employees (AFSCME) recently blamed the largest mutual funds for doing the least to rein in CEO compensation.

The AFSCME report implicates Vanguard, BlackRock (NYSE: BLK  ) , ING (NYSE: ING  ) , and Lord Abbett among the fund families least likely to use proxy voting to properly align pay and performance at public companies.

Interestingly, Vanguard founder Jack Bogle has been known to criticize the mutual fund industry, often saying that it has abandoned its stewardship role in areas like this one. Maybe some people at Vanguard haven't gotten the memo?

Celebrating constrainers
Fortunately, the report indicated that smaller mutual funds are more likely to use their proxy-voting power prudently. AFSCME pointed to Dimensional, Dreyfus, Oppenheimer, and Wells Fargo as the fund families with a higher likelihood of constraining pay. And even though these smaller funds don't exert as much influence, they're joined by a growing proportion of shareholders who've voted to rebuke their companies' compensation plans.

RiskMetrics Group just reported yesterday that five more companies, including Hercules Offshore (Nasdaq: HERO  ) , Intersil (Nasdaq: ISIL  ) , and Helix Energy (NYSE: HLX  ) , have failed to receive majority support for their compensation plans. Cincinnati Bell (NYSE: CBB  ) has the dubious honor of receiving the lowest compensation support so far this year, with just 29.8% approval.

ISS data shows that most companies do enjoy support for their pay policies, but even the relatively few rejections rolling in show that at least some shareholders are taking note of disconnects between pay and performance, and trying to remedy the situation.

Restarting stewardship
Mutual funds's role in enabling outsized pay is no breaking news flash. We dealt with the same theme this time last year, too. From the Foolish comments I've seen, I believe many individual investors feel frustrated at the power these big players wield (or fail to wield, as the case may be).

Still, shareholders now pay more attention than ever to CEO pay in relation to operational performance. Hopefully, more large institutional shareholders will remember their own stewardship role, since they represent an important part of so many Americans' financial future. Using their shareholder power to keep corporations prudently run, and CEO pay commensurate with long-term performance, is a good place to start.

Check back at every Wednesday and Friday for Alyce Lomax's columns on environmental, social, and governance issues.

The Motley Fool owns shares of Hercules Offshore and Wells Fargo. Motley Fool newsletter services have recommended BlackRock. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. For more on this and other topics, check back at, or follow her on Twitter: @AlyceLomax. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (5) | Recommend This Article (16)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 18, 2011, at 8:41 PM, prginww wrote:

    The reality is the individual investor can do little to stop crazy CEO pay. The game is rigged. When you get high enough in the company, you are given tons of shares as a bonus. In return, you vote the way the board wants you to vote. So, as the article points out, it takes the large investor, such as a fund, as well as many small investors to stop the crazy initiatives; including pay, that companies put on their proxies. The compensation chasm will continue to get wider.

  • Report this Comment On May 19, 2011, at 12:44 PM, prginww wrote:

    Agreed- when companies were run in 80's by dedicated harder working CEO's seemed like they cared, Now the CEO's i call them the Lord of the RINGS club, Take care yourself then your buddies, rape pillage and burn as much as you can and then the WORST part get a Bonus to LEAVE - that is what stinks the most PAID to FAIL

  • Report this Comment On May 23, 2011, at 5:42 PM, prginww wrote:

    Maybe CEO's shouldn't make more than movie stars or professional athletes.

  • Report this Comment On May 28, 2011, at 11:56 AM, prginww wrote:

    At least movie stars and professional athletes have to have talent.

  • Report this Comment On June 18, 2011, at 3:56 PM, prginww wrote:

    Pity the Japanese CEO

    The difference between the pay of an average Japanese executive and that of a Japanese worker narrowed last year, while remaining far less than the same gap in the U.S., according to a survey published Wednesday. The Nikkei business daily reported that <b>executives made 4.8 times more than average workers </b>during the April 2009-March 2010 fiscal year, when all types of compensation are included. The difference marked a decline from a 5.8 factor of difference in the previous year.

    The report cited Kansai University professor Koji Morioka as saying the disparity was well below that seen n the U.S., where "top executives are believed to make 350 to 500 times the pay of ordinary workers at some firms." But the professor added that in the U.S., "executive compensation and employee salaries are decided on completely different principles."

    ...I didn't know "take the money and run" was a principle

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