Why This Is a Crucial Time for Investors

For anyone who believes that CEO pay has careened far out of control, say-on-pay votes are more important now than ever. This is particularly because so far, it looks like 2012 didn't put the brakes on pay levels.

USA Today has issued preliminary findings that CEO pay increased 8% in 2012, to a median $9.7 million. These figures were culled from 145 S&P 500 companies that have already filed their 2012 CEO compensation data in their proxy statements.

Obviously this increase outstrips inflation and belies the economic weakness faced by many American workers (and those out of work). As usual, chief executives tend to make out a lot better financially than the rest of the economy -- and society.

It's still early in proxy season, but several companies have already suffered say-on-pay defeats from shareholders. It's time for the rest of us to consider whether CEOs at the companies we own deserve a smackdown on their compensation packages.

First rumblings of dissatisfaction
By mining through filings and current events, one might identify logical reasons why some companies' shareholders have already made their dissatisfaction clear through their proxy votes.

The most withering failure so far has gone to truck maker Navistar (NYSE: NAV  ) . A scant 17.8% of its shareholders voted in favor of the company's CEO compensation policies. Perhaps that's because former CEO Daniel Ustian left the helm last August with $8 million in severance and pension benefits valued at about $17 million.

Digital Generation (NASDAQ: DGIT  ) , which manages and distributes electronic ads, received only 38.7% approval of its CEO compensation policies. Director David Kantor also fared badly in the voting, with 8.6 million votes in favor of his election, and a whopping 7.5 million votes withheld. (Given the lack of an "against" option, withheld votes serve the same purpose.)

The company's been floundering, its stock price has fallen, and it recently announced a quarterly loss and failure to find a buyer. However, on Jan. 1, 2012, CEO Scott Ginsburg left the position, passing it on to Neil Nguyen. Both made out pretty well in 2012. As executive chairman, Ginsburg received a base salary of $629,000 with total pay valued at $9 million, and Nguyen's base salary was set at $592,000, with total pay valued at $8 million.

In addition, according to newly penned employment agreements disclosed in the proxy, should Ginsburg leave his job due to a change in control, he's entitled to a severance package valued at nearly $8 million. Nguyen's entitled to a package valued at about $6 million for the same situation.

Only 41.2% of shareholder votes were cast in favor of Nuance Communications' (NASDAQ: NUAN  ) CEO compensation policies. Although fiscal 2012 was a good year in terms of profit growth, the company's shares have taken a beating in the last month or so on slashed guidance. Meanwhile, it bears mentioning that the company didn't turn an annual profit from 2003 until the fiscal year ended September 2011.

The shareholder wake-up call has already occurred in the majority vote against CEO compensation. CEO Paul Ricci's base salary has increased by 38% to $7.94 million over two years' time, and the total value of his compensation has skyrocketed to $37 million from just shy of $20 million in 2010.

Ricci's "other compensation" in the form of perks also surged to $184 million, with large line items dedicated to use of the company aircraft, reimbursement for tax and financial planning, and a fixed car allowance. By way of comparison, last year his perks added up to $55,000 worth of benefits.

Meanwhile, who knows: Carl Icahn's newly announced stake in Nuance Communications may or may not signal a bit of a shakeup coming.

Scrutinizing salaries
Plenty of companies' pay policies deserve scrutiny. Although some companies are running their businesses well despite hardships in the broad economy, many corporate CEOs are making out like bandits simply because the ongoing market rally has floated many stocks higher, whether business performance truly supported those stock prices or not. In other words, shareholders should look way beyond share price over the last year or two and assess whether the chief executives really have exhibited leadership worthy of their pay levels.

One of the highest-paid CEOs on USA Today's preliminary list is Viacom's (NASDAQ: VIA  ) Philippe Dauman, with a pay package valued at a total $33.4 million last year. That included a base salary of $3.5 million and a bonus of $11.5 million. Dauman is no stranger to the top of such lists over the years.

Also of note are a few chief executives with notably low salaries -- and it's not because they're fumbling at running their companies. Take Berkshire Hathaway's (NYSE: BRK-B  ) Warren Buffett, whose base salary was only $100,000 in 2012, with "other" compensation valued at $434,000. For the man who is such a respected businessman and investor, that's one heck of a modest salary. Pay policies like that deserve kudos.

Take your stand -- and vote
According to USA Today, investing giant and Vanguard founder Jack Bogle said of CEO pay, "I'm shell-shocked. I can't believe this can go on. I can't believe owners of these companies can't take a bigger stand."

That's right, shareowners... it is time to take more significant stands. One sign of hope is that early in 2013, we have heard of several notable CEO pay cuts, like the one taken by JPMorgan Chase's Jamie Dimon. Perhaps more corporate leaders will be held accountable in the coming year, and I hope so.

Still, the sneaking suspicion that the CEO pay party continued to rock on in 2012 reminds us to think about what our chief executives' performance is really worth -- and vote accordingly.

More from The Motley Fool
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Check back at Fool.com for more of Alyce Lomax's columns on environmental, social, and governance issues.


Read/Post Comments (3) | Recommend This Article (6)

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 April 05, 2013, at 11:28 AM, Seanickson wrote:

    A lot of bonuses and stock options are tied to stock performance. The SP500 had an an above average year with a 13.4% gain in price, it makes sense that compensation in that year would be strong as well

  • Report this Comment On April 05, 2013, at 12:35 PM, Darwood11 wrote:

    This is one of those "off the wall" posts, but I think it's relevant to where Alyce is coming from in terms of responsible companies.

    There is an article over at Manufacturing Business Technology about P&G. Now, they are one of those slow growth companies that are considered a dinosaur by some.

    The article was "P&G Achieves Zero Manufacturing Waste At 45 Sites Worldwide"

    http://www.mbtmag.com/videos/2013/04/p-g-achieves-zero-manuf...?

  • Report this Comment On April 05, 2013, at 3:07 PM, TMFLomax wrote:

    Seanickson, that is true. The problem with that is that so much of that ends up not tied to individual business performance and instead is more attributable to a general rally... at any rate, doesn't really help the fact that CEO pay, no matter what, always seems to trend upwards regardless...

    Darwood11, Thank you for sharing that post! Not off the wall at all. It's so interesting! And definitely up my alley!

    Alyce

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