Just How Clever Are Directors on Pay Issue?

Interesting post from Dominic Jones, brilliant author of the IR Web Report, who wonders if directors fumbled, given that so many three year Say When on Pay proposals are being voted down. Or did directors intentionally channel investor anger “towards the less important of the two say-on-pay proposals.”

Such a diversionary tactic gives “a window-dressing opportunity to their institutional investors,” writes Jones. When funds disclose their votes, they can seem to take a hard line, while taking attention away from the fact that they are also voting in favor the more concrete executive pay proposals. “In fact, 87% of pay votes so far have received more than 80% support from investors.” (Say-on-pay frequency battles a clever diversion | IR Web Report, 2/25/2011)

Interesting theory, but I don’t really see directors taking that much interest in providing cover to funds so that fund managers can say they “stood up for the little guy.” The driver here is more likely to be proxy advisory firms that have drawn a line in the sand that is easily understood, publicized, and followed.

Investors can easily understand, “give me power every three years or give me power every year.” What we can’t understand, unless we devote a lot of resources to filling out scorecards on executive pay proposals using the typical metrics used by large and conscientious institutional investors,  is whether or not we should vote in favor of a board’s pay proposal.

We often know in our gut that the bottom line pay that a proposal yields will be outrageous. But aren’t basketball players paid outrageous amounts too? Unless we’re willing to crunch all the numbers, we generally vote with the board’s recommendation.

While I’m all in favor of incentives to increase the holding period on option and/or stock grants, clawbacks for unearned bonus and incentive payments, cutting back on absurd perks, tying bonuses to performance that take into account market movements and peers, limits on severance or change-in-control payments, and the myriad of other details these good governance funds are concerned with, I also think we also need a few simple overarching guidelines.

  • Will the CEO earn more than 100 times the average worker?
  • Will they take more than 5% of the company’s net profit?
  • How are funds voting that actually put themselves out there by announcing their votes in advance on ProxyDemocracy.org?

I’m sure there are more simple guidelines and these examples may not be the best. As I said in a recent post, which I’m delighted Jones cites (Addressing CEO Pay), members of the United States Proxy Exchange will soon begin working on a paper to address the issue of CEO pay. I’ll be advocating a few simple metrics to ratchet down the “Lake Wobegone effect” and to help wean America away from what has increasingly become a “winner take all” mentality.

As long as directors keep thinking their company’s CEO is above average, the average will keep going higher and higher every year as the baseline comparison rises. Between 1980 and 2004, real wages in manufacturing fell 1%, while real income of the richest one percent rose 135%. The top 1% average $3.2 million a year, while the bottom 90% average $31,000 based on 2008 data. The top 1% control 35% of America’s net worth, while the bottom 90% control 27% based on 2007 data. (It’s the Inequality, Stupid, Mother Jones, 3-4/2011) Looking at the world as a whole, the richest 1% control 43% of total assets according to The Economist (More Millionaires Than Australians, 1/22/2011), whereas the bottom 50% control 2% of assets.

I don’t think we should wait for these gaps to widen further before taking action. If average CEO pay for S&P 500 firms moved from the current $9.25 million per year to $4.6 million a year, would average CEO performance be cut in half? I doubt it. Conscientious institutional investors will go after the outliers, the most outrageous examples. Somebody needs to go after the herd. Let’s make use of the pay ratios that have to reported in the CD&A because of Dodd-Frank while we still can.  That requirement could be gone before we know it the way things are headed in Congress.

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