A proposal by Qube Investment Management, which owns 10,208 shares of Microsoft ($MSFT), to cap pay has been challenged through the “no-action” process. See incoming correspondence to the SEC. The resolved clause of Qube’s proposal reads as follows:
Resolved: The the Board of Directors and/or the Compensation Committee limit the average individual total compensation of senior management, executives and all other employees the board is chanted with determining compensation for, to ONE HUNDRED TIMES the average individual total compensation paid to the remaining full-time, non-contract employees of the company. The determination of total compensation should include base pay and salary, performance rewards including restricted, exercised and nonexercised stock options, pension costs and all other discretionary and non-discretionary awards and bonuses for that year.
Qube argues it is rational to expect a link between the pay of all Microsoft employees. Basing CEO pay peer group comparisons ratchets pay up while “demoralizing employees with an inconsistent pay gap.” “Pay should be conducted within the context of compensation for the organization as a whole and an extension of the infrastructure that governs the rest of the company’s wage program(s).”
These arguments seem consistent with the findings of recent research by Charles Elson and Craig Ferrere. Executive Superstars, Peer Groups and Over-Compensation — Cause, Effect and Solution, finds that, contrary to common belief, executives are not frequently moving among top slots, and when they do, it’s often with less-than-stellar results. “While it used to be based on peer compensation, here, we’re saying the starting point should be internal,” says Elson. “This is better, because it can be consistent with the company’s pay scale.” (The Trouble with Peer-Pay Benchmarking for CEOs, Human Resources Executive Online, 5/2/2013) From the abstract of their study:
We argue that: (I) theories of optimal market-based contracting are misguided in that they are predicated upon the chimerical notion of vigorous and competitive markets for transferable executive talent; (II) that even boards comprised of only the most faithful fiduciaries of shareholder interests will fail to reach an agreeable resolution to the compensation conundrum because of the unfounded reliance on the structurally malignant and unnecessary process of peer benchmarking; and, (III) that the solution lies in avoiding the mechanistic and arbitrary application of peer group data in arriving at executive compensation levels. Instead, independent and shareholder-conscious compensation committees must develop internally created standards of pay based on the individual nature of the organization concerned, its particular competitive environment and its internal dynamics.
Microsoft seeks to exclude the proposal on the basis of Rule 14a-8(i)(3) and Rule 14a-9 as impermissibly vague and indefinite and on the basis of Rule 14a-8(i)(7) because the proposal deals with “ordinary business” operations. Microsoft may win but how many more years will go by… how far must the wealth divide go until setting CEO pay is such a matter of public concern and attention that it is no longer considered ordinary business.
According to a recent article in Bloomberg (SEC Said Near Proposal on Disclosure of CEO-to-Worker Pay, 7/18/2012), The SEC could vote to introduce the Dodd-Frank regulation requiring companies to report pay ratios “as soon as Aug. 21.” Across the Standard & Poor’s 500 Index of companies, the average multiple of CEO compensation to that of rank-and-file workers is 204, up 20 percent since 2009, according to data compiled by Bloomberg. The numbers are based on industry-specific estimates for worker compensation.
The Chamber of Commerce and other CEO dominated business groups have lobbied strongly against the rules. The Republican-controlled House Financial Services Committee voted June 19 to repeal the provision. According to the article:
The AFL-CIO has told the SEC it could reduce the costs of compliance by allowing companies to calculate median pay using statistical sampling. The union also insists foreign and part-time workers should be included in any calculation, said Brandon Rees, acting director of the AFL-CIO’s office of investment.
Whatever the result is on the no-action request or the SEC’s action on regulations, pay ratios are likely to become an increasingly contentious issue. Having real numbers available will help bring the issue to a head.