Is Shareholder "Say on Pay" Working?

For years, CEO pay rose largely unchecked in America. Although leaders who build great companies deserve pay commensurate to their accomplishments, too many underperforming or lackluster CEOs make astronomical amounts of money at shareholders' expense. It's odd that one class of workers tends to make millions -- often without a performance review.

Dodd-Frank made say-on-pay votes mandatory, giving shareholders a chance to vote "yea" or "nay" on the CEO compensation policies at the companies they own. Shareholders are increasingly not only aware of their proxy ballots, but also marking them, occasionally voting overwhelmingly against outsized pay and other corporate policies.

Although these votes are always nonbinding, shareholder activism and several years of vote results may be giving boards of directors a bit of a reality check from owners of public companies. Maybe the message is starting to get through.

Stepping outside the usual
The Wall Street Journal recently reported data from a Hay Group survey of proxy statements filed from May 2013 through the end of January. Overall, median CEO pay increased by 4.1% in 2013. One particular point of interest, given the way CEO pay usually works, is that the increase actually paled in comparison to the median returns those companies' shareholders enjoyed -- a whopping 25% at the companies surveyed.

CEO compensation overall has increased rapidly for years, even in times when the overall economy and corporate performance faltered. CEOs enjoyed one of the first major "recoveries" in a stunted economy, even as many Americans received pink slips or filed for unemployment.

According to the AFL-CIO's annual account of CEO-to-worker pay ratios, in 2012 that ratio reached 354 to 1. In 1982, the ratio was a mere 42 to 1.

On the other hand, The Wall Street Journal also reported separately that so far this proxy season, more shareholders have been supporting pay packages. Towers Watson has performed an early survey of 170 Russell 3000 companies showing that an average of 93% support for pay policies compared to 90% last year.

Further, the Journal reported that even proxy advisory firms seem to be standing down a bit, with Institutional Shareholder Services having recommended that only 4% of companies get a thumbs-down on CEO pay, compared to 14% last year.

Perhaps several years of high-profile pressure have made some corporate boards try harder to tie compensation to performance.

Taking a little less
Overall, CEO pay is still in the stratosphere, but the increased focus on the fairness of executive pay is a step in the right direction. Cutting CEO pay after difficult years is a sensible policy right off the bat, as is avoiding shareholder ire by rethinking pay policies.

Darden Restaurants (NYSE: DRI  ) , for example, has had a rough time lately, suffering from slowdowns in its major restaurant chains, Red Lobster and Olive Garden. Just last week, Darden reported disappointing third-quarter results revealing a 20% decrease in net income and slipping same-store sales at both chains. 

Activist investors have targeted Darden, taking issue with the company's plan to unload the Red Lobster chain and recently even suggesting that CEO Clarence Otis be let go.

While Darden isn't what I'd call a great investment right now, to Otis' credit, he has taken a pay cut during choppy times. His compensation fell 24% to $5.9 million when the company's fiscal year ended on May 26, 2013. Shareholder return had already dropped 4% that year.

Mondelez International (NASDAQ: MDLZ  ) CEO Irene Rosenfeld's compensation fell by half last year to a total of $14 million, and she's not getting a raise this year. Although part of her drastic cut relates to a $10 million bonus she received last year, recent financial tidings haven't given shareholders much reason to approve a big payout for Rosenfeld.

As has been the case for years, Oracle's (NYSE: ORCL  ) Larry Ellison was a list-topper when it comes to massive pay. However, last year his compensation did decrease by 19% to $77 million. The reduction didn't unseat him from the top spot, but he did decline an extra $1.2 million because the company's growth didn't meet expectations.

Further, rumblings of shareholder discontent may have caught some attention, and surely his rejection of the bonus probably offered little consolation. The majority of shareholders have voted against Oracle's pay policy two years in a row, and three directors only received 60% of the votes for re-election.

Logic-based pay
Investors often come down on opposite sides of this issue, which is understandable. Rewarding leaders who do great work is hardly irrational. What's irrational is the widespread failure to make sure CEOs actually earn millions upon millions of dollars. Rewarding CEOs for underachievement gives them little incentive to excel, and this backward logic has prevailed for too long.

The proxy season is nowhere near over, and shareholder votes at major companies will continue to roll in. So far this year, though, there seems to be a relative shortage of drama and only a few pay decreases.

Perhaps the lull in CEO pay outrage means more boards are listening -- and, hopefully, acting accordingly.

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


Read/Post Comments (9) | Recommend This Article (11)

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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 04, 2014, at 8:07 AM, PanchoAlmeja wrote:

    I see the cases cited above as anecdotal. CEO have no real incentive to match their pay with company performance, quite the opposite is true. This is exacerbated by the drop in the average tenure of CEOs of American companies. By encouraging them (politically), we are giving them permission to raid the coffers and run, giving way to another. Unfortunately, realistically speaking, this is a moral/ethical issue. I can see any policy that can effectively change this situation. And even if there was such a policy, the lawmakers brave enough to bring it up will commit political suicide…

  • Report this Comment On April 04, 2014, at 9:39 AM, RobertBaillieul wrote:

    Shareholders of the world unite!

  • Report this Comment On April 04, 2014, at 11:25 AM, damilkman wrote:

    We hate CEO's but do not mind the massive spike in compensation for entertainers be it movies, music, or sports. Why is it evil for a CEO to be overpaid yet a football coach at a supposed institution to get paid huge dollars? Should a record company demand compensation if an entertainers new album flops?

    In entertainment if you fail to deliver you don't get the big dollars. The sports star who is unable to perform does not get a new contract. If a CEO is not performing then he should be fired. If a CEO is forced to depend on short term goals, shame on you stock holders who demand instant gratification instead of Buffet style hold and build.

    And that goes to my last point. The only reason why CEO's think short term and why boards pay them so much is YOU!!! The holder of the stock is the impatient one that clamors for an instant ten bagger NOW! If there was no such a pressure for immediate performance CEO pay might not be so high.

    Instead of logical patient planning the instant fixers or those who claim they can turn paddy water into wine come at a high premium, just as the over the hill baseball pitcher can command a 20 million dollar salary. Sports fans just like investors want to win now and are not interested in a team building through the farm system.

    Just another perspective.

  • Report this Comment On April 04, 2014, at 4:32 PM, RNF62 wrote:

    I have just voted my shares against KO's 2014 very generous Equity Plan. But...will the big shareholders do the same? W Buffet holds 9%. What will he do? I'm interested in the outcome April 23rd!

  • Report this Comment On April 09, 2014, at 11:59 AM, SwampBull wrote:

    Let's say that the mean average salary (note: median would be likely lower) of an employee at a given company is $50,000 a year. At the 354:1 ratio mentioned in the article, this means that the CEO is pulling in $17.7 million a year in cash, stock incentives, free bagels, whatever.

    If the company above were the size of Google, with 47,756 employees as of today according to Google Finance (they ought to know, right?), then if this hypothetical CEO reduced his compensation to $1 and simultaneously divvied up his 17.7 million smackeroos, then each employee would receive an extra $370. Not chump change, but not life changing, either.

    Another point here is that the CEO's ratio may have increased for reasons other than "all rich people are just greedy pigs who feed off of the little guy" as implied by the mainstream media.

    For one thing, more people are working for giant international conglomerates today than in 1980. These companies have 100's of times the revenue and earnings of those of the 1980's, are more complex and manage 10's of thousands if not 100's of thousands of employees. Yet there is still only one CEO job. You could argue that the top VP's and even regional managers of such an outfit should earn more since they are the 'boots on the ground', but the economics of scale remain the same.

    Another point is that we have added more layers of abstraction between owner and public company, to the detriment of corporate governance. By which I mean that as the stock holder goes from owning stocks to owning mutual funds, ETFs, what-have-you, they are further removed from that which they own. Now the performance-minded fund manager holds the purse-strings effectively, rather than the individuals investing.

    So, ultimately I do not care what a CEO makes. And if CEOs were all forced to take an 85% pay cut, I will not benefit in the least as far as I can tell. The important thing is that shareholders increase their influence en masse (not just those pesky activists like Ackman and Icahn) to achieve better long-term prospects for their enterprises.

  • Report this Comment On April 09, 2014, at 12:51 PM, HoosierRube wrote:

    Silly.

    I dont know about the rest of you, but I know for a fact that i am not qualified to determine what a CEO gets paid. Thats why corporations have boards, where the members are well equipped to deal with compensation issues.

    Why does everyone believe that activisim is a good thing. Wasnt good for the French after the French Revolution, or the Russians after the Russian Revolution, or the Chinese after the great Mao awakening.

    I dont want Joe Smoe, that has no background in compensation issues, making those decisions. Thats just nuts.

    Lets take a look at what the Leftist Approved companies do for CEO compensation;

    1. Starbucks 17 million

    2. WholeFoods 3 million

    3. TCS 2 million

    4. Tesla 78 million

    So, is 2 better than 3 and 3 better than 17 and 17 better than 78?

    Unless you're privy to the details, no one can make that call. Not even the author of this 'slice your own wrists' commentary could undertake.

    Maybe the Tesla CEO actually was worth 78 million and the TCS CEO was NOT worth 2 million.

    You never know. But you want to have your say regardless eh?

  • Report this Comment On April 13, 2014, at 6:48 AM, skypilot2005 wrote:

    On April 04, 2014, at 4:32 PM, RNF62 wrote:

    "I have just voted my shares against KO's 2014 very generous Equity Plan. But...will the big shareholders do the same? W Buffet holds 9%. What will he do? I'm interested in the outcome April 23rd!"

    re:

    Coke's compensation plan is "outrageous" and "excessive": Wintergreen's David Winters

    By Morgan KornApril 11, 2014 12:17 PMDaily Ticker

    David Winters, CEO of Wintergreen Advisers, won't back down from his battle with the world's largest soda maker. Winters has openly criticized Coca-Cola's (KO) proposed 2014 equity compensation plan, calling it "potentially highly dilutive to shareholders"..."unnecessary"..."unsupported by any strategic rationale" and "a bad precedent for corporate America." And that's not all.

    In a March 21 letter to Coca-Cola's board of directors, Winters characterizes the proposal as an "outrageous grab" and an “excessive transfer of wealth” from Coca‐Cola shareholders to the company’s senior management.

    Winters accuses Coca-Cola of not adequately disclosing its equity plan in proxy materials. Wintergreen Advisers, which owns about 2.8 million shares of Coca-Cola, will ask board members to withdraw the proposal at the company's April 23 shareholder meeting. Calvert Investments and The Ontario Teachers’ Pension Fund announced this week that they will vote against the compensation plan; Calvert also seeks a resolution that would separate the chairman and CEO roles.

    "The plan has the potential to dilute shareholders by 14.4%," says Winters in the video above. "That's a transfer of about $28 billion worth of equity to 6,400 people, or 5% of [Coke's employees]. We need a more shareholder-friendly equity plan."

    Alyce,

    Please continue your articles on the important subject of the "Legal Larceny" being committed by the management and boards of most large U. S. corporations.

  • Report this Comment On April 14, 2014, at 9:59 AM, damilkman wrote:

    To skypilot's concerns on dilution. Why not vote with your money and get out? Coke is stating what their compensation plan is. If you truly believe that Coke is going to be diluted 14% you should not invest. If you believe that the more likely dilution is not going to be 1% like past years and Coke is a BUY then buy.

    When you read a review of a movie that it is terrible do you pay money to watch it anyway so you can feel cheated? When the product is a dog, we vote with our pocketbooks. Everyone else sees the same proposal that Captain Wintergreen is complaining about. If it is as nasty as he says it is, then Coke will drop like rock.

  • Report this Comment On April 16, 2014, at 7:31 AM, devoish wrote:

    "The statute in question is section 162(m) of the US Tax Code, which became law as a part of President Bill Clinton's first budget, in 1993. That section of the tax code says a company can only deduct only the first $1 million of a CEO's pay on its taxes, as well as the first $1 million for the next four highest-paid officers.

    That sounds reasonable enough — using taxes to disincentivize higher executive compensation should, theoretically, cause businesses to rein it in a bit. But there's a huge loophole: 162(m) also says that performance-based compensation doesn't count. Performance-based compensation comes outside of regular pay including CEO's regular salary, and can include things like stock options — a form of compensation that allows a worker to buy stock in the company at a set price and during a specific time — as well as other kinds of incentive-based pay.

    As Joe Nocera writes in the New York Times this week, the law was immediately exploited — some companies upped executives' annual salaries to $1 million and began setting low performance standards. Members of four major companies' compensation committees, speaking anonymously, told Businessweek in 2006 that the law was barely a stumbling block in their efforts to pay CEOs whatever they felt was appropriate. Since companies are free to define performance in different ways and change from time to time, it’s just not that hard to configure any pay package you want to be ‘performance-based." - http://www.vox.com/2014/4/15/5616946/the-law-that-failed-to-...

    Who should profit from corporate income? CEO's or investors? Great discussion - your employee.

    Best wishes,

    Steven

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