Is Shareholder "Say on Pay" Working?

Shareholder focus on CEO compensation might be bringing it down to earth.

Apr 3, 2014 at 5:13PM

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 for more of Alyce Lomax's columns on environmental, social, and governance issues.

Alyce Lomax has no position in any stocks mentioned. The Motley Fool recommends PepsiCo. The Motley Fool owns shares of Oracle. and PepsiCo. Try any of our Foolish newsletter services free for 30 days. 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.

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