Epic Fails in CEO Pay

Shareholder rebellion against outrageous CEO pay didn't stop with the epic fail at Citigroup (NYSE: C  ) . So far this year, shareholders have rejected 49 companies' CEO compensation policies by voting their proxy ballots. This marks an increase from last year -- and it's an increasingly positive development for shareholders who have the common sense to believe in pay for performance, not epic pay "just because."

This year's 49 say-on-pay failures have already exceeded the 44 say-on-pay failures recorded in 2011, and some companies' shareholders haven't even voted yet.

Dropping the f-bomb
GMI Ratings, which provides global corporate governance and environmental, social, and governance, or ESG, research, reported on the increased number of say-on-pay failures this year and also said its data shows that more large companies are failing these now-mandatory votes than they did a year ago.

Of companies that have failed say-on-pay votes, 34% are components of the Russell 1000 and 27% are in the S&P 500, compared to last year's failed 27% and 16%, respectively.

Citigroup is a well-known company, but some of the other companies that have failed say-on-pay votes have decent name recognition, too. Big Lots (NYSE: BIG  ) , Pitney Bowes (NYSE: PBI  ) , and Mylan (Nasdaq: MYL  ) aren't exactly tiny, obscure companies. Mylan may have the least name recognition of the three, but it's the company behind the EpiPen used for serious allergic reactions, as well as other pharmaceutical products.

In those examples, Big Lots CEO Steven Fishman's 2011 total compensation was valued at $11.9 million, Pitney Bowes' Murray Martin's pay was valued at $9.2 million, and Mylan's Robert Coury took the proverbial cake with total compensation valued at $21.3 million. I'm sure shareholders really appreciated the fact that Coury got that $900,000 "discretionary bonus" last year on top of all the other compensation.

Nabors Industries also received a rebuke from shareholders this year, and with 100 million good reasons. In 2011, Nabors' Chairman and CEO Eugene Isenberg ended up entitled to a $100 million payout even though he wasn't even truly leaving the company. A clause in Isenberg's employment contract was triggered when he was removed from the CEO role, even though he would still stay on as chairman. Although he ultimately decided not to take the payout, shareholders probably hadn't forgotten he'd taken home hundreds of millions in pay over the previous three years, even while his company performed worse than its peers.

Nabors' shareholders voting "no" on pay this year is one of four cases of "nay-on-pay" deja vu; a majority of shareholders also voted against Nabors' compensation policies last year. The only thing that's changed is that a scant quarter of shareholders supported compensation at the company this year, as opposed to about 40% last year. Nabors had best get the message now, right?

Adding accountability into the compensation equation
Some investors defend high levels of compensation for CEOs as a necessary component of a free market. That argument belies reason, though. The way things have been going for years now, CEO compensation seems to be one of the only growth areas in our otherwise lackluster economy, even when the companies many of these individuals lead aren't doing well.

Compensation committees that are loaded up with directors who are chief executives at other companies, and massaged company "peer groups" to provide comparisons to float everybody's compensation boats, are the ways many CEOs are paid mega-millions without producing real shareholder performance. That's not a free market, it's a rigged game.

The increasing number of say-on-pay failures is a victory: Shareholders are shedding past apathy to show they're aware of the pay/performance disconnects at many companies and they're finally willing to push back.

Here's another positive development. Although JPMorgan Chase's (NYSE: JPM  ) CEO Jamie Dimon has long been viewed as a prince among banker CEOs, he recently fell from that state of grace. However, today Dimon told Congress of the possibility of salary clawbacks for senior executives linked to the risky behavior that caused the $2 billion trading loss at that company.

Dimon brought a refreshing idea to the table: real financial accountability for leadership mistakes. That's something our marketplace has been sorely lacking. The use of clawbacks would likely persuade many corporate leaders to take a bit more time to figure out whether their decisions are too risky or will really build a strong long-term business.

Without true accountability, all we have is a free-for-all that doesn't even incentivize good financial and operational performance from our publicly held corporations. Thankfully, more shareholders are delivering the "fail" message to corporate boards and managements, and that's the first step to demanding accountability.  

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

Alyce Lomax does not own shares of any of the companies mentioned. The Motley Fool owns shares of JPMorgan Chase and Citigroup. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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