These Corporate Managers Aren't Sweating Over CEO-to-Worker Pay Disclosure

Last week, the Securities & Exchange Commission proposed a new rule that would require companies to disclose the specific ratio of their chief executive officers' pay to that of their average workers. Many corporate managers and boards of directors are flipping out, and for them, there's probably good reason. The disclosed discrepancies would boggle many minds, particularly for leaders who haven't been performing up to par.

Still, some CEOs, moving under many radars, receive extremely fair compensation based on performance or exemplify the shared-fate philosophy in which managers treat their stakeholders with respect or even like family members.

These are the corporate leaders who don't have to panic about this proposal. I asked some of The Motley Fool's top analysts about some examples that many of us may not have viewed through this lens. Costco is a typical go-to example, but other CEOs may not be getting the attention and applause they deserve.

Berkshire Hathaway
When investors think of Berkshire Hathaway's (NYSE: BRK-B  ) Warren Buffett, they generally think "billionaire." And they should; he's one of the most successful businessmen and investors in history. However, it may not occur to many investors that he receives modest compensation for his role as chairman and CEO of the company -- and has for years.

Buffett makes a base salary of $100,000 at Berkshire Hathaway. Adding in "other compensation," his grand take-home total last year was about $424,000. There's nothing for shareholders or anyone else to complain about there. For years, he has also been a vocal critic of the continuous upward trajectory of CEO pay in America.

Take the following quote, just one of many: "The typical large company has a compensation committee. They don't look for Dobermans on that committee, they look for Chihuahuas. Chihuahuas that have been sedated ."

Kinder Morgan
Kinder Morgan
(NYSE: KMI  ) was brought up by several of my colleagues, and a peek into its proxy filing disclosure was so impressive that I felt a bit light-headed.

Chairman and CEO Richard Kinder's base salary is $1 per year. In many cases, investors might look askance at CEOs with $1 base salaries. Although it's theoretically admirable, some chief executives with $1 base salaries can more than make up for it through bonuses, perks, and options grants.

Kinder, however, receives no bonuses or options. Another disclosure that made my hair stand on end (in pleased surprise) reads thus: "Mr. Kinder does not have any deferred compensation, supplemental retirement or any other special benefit, compensation or perquisite arrangement with us, and each year Mr. Kinder reimburses us for his portion of health care premiums and parking expenses."

What the what? Reimbursement for health care premiums and even parking expenses puts this completely over the top -- in a good way. Many CEOs receive crazy benefits of all kinds, including corporate-paid personal security services, cars, use of corporate jets, and even financial planning.

Kinder Morgan also gets a pat on the back for alignment with regular shareholders. Kinder owns a 23% stake in Kinder Morgan; for the company's shareholders, that translates to "We're all in this together."

And it gets better. The company has a salary cap for management of a mere $400,000. However, in its recent proxy statement it reveals that it's increasing managements base salaries to $325,000 this year, and it doesn't believe their salaries will reach the $400,000 cap for years. In the grand scheme of things, such caps are positively bizarre -- with an emphasis on "positive."

Morningstar
Joe Mansueto founded Morningstar (NASDAQ: MORN  ) , and as chairman and CEO, he doesn't seem to view the company he launched as his personal cash cow. Like Richard Kinder, he doesn't receive bonuses, options, or crazy benefits at shareholder expense.

According to Morningstar's most recent proxy:

In consideration of his status as our principal shareholder, Joe Mansueto believes his compensation as our chief executive officer should be directly aligned with other shareholders and be realized primarily through appreciation in the long-term value of our common stock. Accordingly, at his request, he does not participate in our equity or cash-based incentive programs. In addition, since resuming his role as our chief executive officer in 2000, his annual salary has been fixed at $100,000. While the Compensation Committee may review and make recommendations to the Board concerning Joe's compensation, we expect that his salary will remain at $100,000 per year for the foreseeable future.

Mansueto's "other compensation" is insanely low compared to the "other compensation" awarded to so many CEOs that I've seen in my time: about $5,300 for basic life insurance and 401(k) matches like most of us regular folks receive. That's mind-bogglingly awesome.

Mansueto's ownership also puts his interests in line with regular shareholders: He has a 53% stake in the company.

Markel
Several of my colleagues pointed to Markel (NYSE: MKL  ) as a great example of balancing performance and reward.

Top managers' bonuses are tied to five-year average book value per share -- a huge departure from so many companies' compensation tendency to reward first, ask personal-performance questions later. (Of course, too many never question true performance at all.)

Here's an interesting quote from Markel's latest proxy statement, which should comfort its shareholders:

The five-year measurement period provides balance between line of sight for actions currently being taken and a long-term perspective in managing the Company's operations. In addition, using a longer-term measurement period does not encourage the taking of excessive or unnecessary risks in order to earn incentive compensation.

Anyone who lived through the financial crisis knows what happens when managements are incentivized to take unnecessary or excessive risks. Markel also possesses a policy that many companies should instate but, of course, would rather not: a claw-back policy that would take back financial rewards in the case of restatements due to intentional misconduct or outright fraud.

In another example of a more humble approach, managers' benefits are exactly the same as those of rank-and-file employees.

Cause for celebration, not consternation
The most widely reported cases of outrageous CEO pay can guarantee that concerned shareholders and other stakeholders will be constantly angry. There are countless examples of egregious pay that can be considered akin to plundering.

I'm glad that one of my colleagues recommended some high-fives for companies with CEOs and boards of directors that are choosing to do the right things instead of the wrong ones. It's easier to be angry than admiring sometimes.

The idea of a rule to disclose CEO-pay-to-worker ratio has sparked outrage from many in the business community. I've heard a similar refrain repeated often in the counterargument: that it's only meant to embarrass chief executives and boards of directors. But you know what? Far too many deserve to be embarrassed. In the market-based society that many investors insist we are living in -- one in which ethics and merit would make it work far more smoothly -- it should be embarrassing to be caught picking other people's pockets for way more than chump change.

Big business interests that are freaking out aren't in the right; they're defensive and likely quite worried about their bank accounts.

On the other hand, some CEOs -- and their shareholders -- simply won't vote against their pay if it's modest, the performance is stellar, and so forth. In other words, these people simply don't have to sweat it. It's nice to know.

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

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Read/Post Comments (19) | Recommend This Article (47)

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 September 26, 2013, at 4:45 PM, Rockie24 wrote:

    Thank you for the article. CEO compensation should be in news periodically. It is thru I picked a company in the pass not just for the performance, but also for CEO compensation. I like to see CEO himself in same position than I am. Waiting for results not for bonuses.

    And vice versa. I sold a company- Oracle, when I found how much CEO took at home.

    If someone takes a pay 5000x bigger than average salary in the company, only one excuse would validate such a salary. If this person take a work load of 5000 employees and let them go.

    On the other hand it is plain stealing from my company.

  • Report this Comment On September 27, 2013, at 7:17 PM, MikeB915 wrote:

    I always appreciate your articles, Alyce! In this case, you just made me want to buy the rest of the above stocks that I don't already own! I think it would be good to make this a regular topic from time-to-time.......as well as, shining the light on some of the grossest offenders too. Again, great job, Alyce!

  • Report this Comment On September 27, 2013, at 7:18 PM, toomuchgas wrote:

    The ratio of CEO to worker salary gets the liberals all hot and bothered but has nothing to do with what the CEO is worth. Just another irrelevant issue for the Democrats to stamps their feet about.

  • Report this Comment On September 28, 2013, at 12:46 PM, situpandflyright wrote:

    I agree with MikeB915---a future article should be about some of the grossest offenders. I want my ceo's pay to be tied to company performance. As a shareholder it is MY company after all.

  • Report this Comment On September 28, 2013, at 12:49 PM, TMFGemHunter wrote:

    Interesting article. But this is somewhat skewed by the fact that you're focusing on founder-CEOs. When somebody owns billions of dollars of company stock, it's not so impressive to me when he/she takes a low compensation package. Buffett could hike his pay from $100K to $100 million and wouldn't see any material change in his well-being. (That said, there are CEOs who own tons of stock and still pay themselves ridiculous salaries.)

    But the real question is: are there CEOs of major corporations who don't own much company stock AND don't get paid much. In other words, CEOs who actually have to live like most of their workers? I think there would be very few examples on that list!

    Adam

  • Report this Comment On September 28, 2013, at 1:34 PM, pnielsen48 wrote:

    Good article. The key is aligning the management with the interest of the stockholders. I was aware of the Rich Kinder situation at Kinder Morgan and am already well represented in both KMI and KMR. Much more to that story. Mr Kinder was the guy at Enron successful at Gen Counsel but passed over for Pres in favor of a well known guy still in federal prison, when Kinder maintained his focus on tangible assets... Now Kinder is I think the highest worth billionaire in Houston after Dan Duncan's estate has been posthumously divided among family members.

  • Report this Comment On September 28, 2013, at 1:57 PM, corpgov wrote:

    Great article. I think you could mine this topic with several followup posts. I like Adam's idea of trying to find CEOs who aren't founders who are paid like regular employees... most likely where companies have strong programs to groom internal candidates.

    You've regularly got some of the most interesting and best posts on Motley Fool or elsewhere. Keep up the great work.

  • Report this Comment On September 28, 2013, at 2:04 PM, thorw wrote:

    I agree with TMFGemHunter, it would have been good to find other examples where there wasn't other 'hidden' compensation. Unless these guys are selling stock to live off of, or buy/sell across changes in the companies stock I don't see the alignment. As for owning shares making it my company (aka shareholder value), as a shareholder there's no direct involvement in success or failure of a company, you're just along for the ride and hope that the people actually making a difference in that company, make a positive difference.

  • Report this Comment On September 28, 2013, at 7:46 PM, semieng wrote:

    Great article. I would like to see this number (total CEO compensation/average employee compensation) presented for all stocks that MF covers and included as a Risk Ratings factor, as well.

  • Report this Comment On September 30, 2013, at 1:32 AM, lowmaple wrote:

    Certainly some CEOs should be PAYING shareholders for all the good they seem to do. However I don't expect CEOs to be in the same pay magnitude, after all without some of these leaders the companies would not award shareholders as well. Many of us buy stocks to make money and secure retirements otherwise we would just put are money in bank accounts.

  • Report this Comment On September 30, 2013, at 11:09 AM, TMFLomax wrote:

    Thanks everybody! I'll respond in more detail later but a couple things... I have tended to write MANY articles on the offenders that are paid oodles despite non-performance, but a coworker pointed out (how could I forget the positive element) that some CEOs have this down. I knew that in some ways -- had a few go-tos I'd mention in articles like Costco's Jim Sinegal (who I don't believe was a founder if I remember correctly, but most certainly was so down to earth -- would tour the stores, answer his own phone, buy clothes from Costco, etc.). Asking some of our analysts for some great examples gave me some I really hadn't tracked, and they affected me in some a positive way.

    Agreed that founders often have this outlook. They have more skin in the game since there's the extra incentive that these companies are in a way their "babies." Not just about money, but also about that sense of pride in their companies.

    Semieng, I think your idea is great -- disclosure AND the inclusion in filings' risk factors. The risk factors idea is thinking out of the box!

    Best,

    Alyce

  • Report this Comment On September 30, 2013, at 11:10 AM, TMFLomax wrote:

    Oops already mentioned Costco in the article so Sinegal was a go-to go-to. ;)

    Alyce

  • Report this Comment On September 30, 2013, at 4:23 PM, slickandjake wrote:

    I have been saying for a few years now that I would be in favor of tying a CEO's and/or executive pay to the workers of a corporation. When I hear Democrats say "fair share" and "distribution of wealth", I cringe because they have no definition of that. They say it to get the middle and poor class folks all excited, but it materializes into nothing. Distribution is a statistical term, so I would be in favor of a bell curve pay scale for corporations whereby the top paid people can only earn a certain number of deviations from the mean (as well as the lowest paid employees the other way). This is easier said than done, but there must be a statistical way to determine "fair pay". Something has to check and balance executive pay, and it shouldn't be a Board or committee of other CEO's!

  • Report this Comment On September 30, 2013, at 5:06 PM, gskinner75006 wrote:

    Stock ownership, options, grants are also a form of pay for most executives which are not available to the rank-and-file employee. I'm willing to bet there are only a handful that work for Mr. Buffet that can afford to buy Class A shares of Berkshire Hathaway. I'm also willing to bet that there are very few within the companies that are owned by Berkshire Hathaway that can afford to even buy Class B shares.

  • Report this Comment On October 01, 2013, at 3:24 PM, TMFLomax wrote:

    Hey everyone,

    Again, thanks for the feedback. I actually have covered the abusive pay packages much more often than the good ones, and I should have more balance with that.

    Here was the lead-up to this one, which is definitely on the other side of the fence:

    http://www.fool.com/investing/general/2013/09/20/surprise-ce...

    The abuses have been going on for a long time (corpgov above knows this, he's been following corporate governance issues for years! And corpgov, thanks for the compliment!) and sometimes it is easier to hit the most outrageous.

    Adam, that is a good point -- off the top of my heads I can't think of many like you describe, although again, Sinegal was modestly paid to begin with and that didn't seem to be his driving force in doing well.

    I should definitely mine for more articles from many of your suggestions! Thanks for all the thoughts!

    Best,

    Alyce

  • Report this Comment On October 01, 2013, at 4:05 PM, sagitarius84 wrote:

    I like situations where shareholder and management interests are aligned - such as the case with these companies profiled here:

    http://www.dividendgrowthinvestor.com/2013/07/the-importance...

  • Report this Comment On October 01, 2013, at 4:15 PM, XMFConnor wrote:

    I fail to see how CEO pay/ avg employee pay is an effective metric for anything except making people angry.

    Rather than hypothesize on whether this metric means anything, why don't you test for historical correlation between this metric and company performance?

  • Report this Comment On October 02, 2013, at 1:02 AM, BMFPitt wrote:

    What companies don't care about that disclosure? All of them. Aside from the inconvenience of it and possible wasted paper.

  • Report this Comment On October 02, 2013, at 7:30 PM, charmboy wrote:

    So far, XMFConner has made the most valuable argument.

    Alyce I would like to see better/more information about this matter.

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