The 100 Most Overpaid CEOs: Are Fund Managers Asleep at the Wheel? is the second such report from As You Sow in two years. I hope it continues as an annual tradition. I urge everyone to read it. Rosanna Landis Weaver, Jackie Cook and others contributing to this project did a great job. As Nell Minow said of the report:
Overpaid CEOs: Rational Apathy at Investment Funds
Below are a few highlights from their press release and executive summary:
CEO pay grew an astounding 997% over the past 36 years, greatly outpacing the growth in the cost of living, the productivity of the economy, and the stock market, disproving the claim that the growth in CEO pay reflects the “performance” of the company, the value of its stock, or the ability of the CEO to do anything but disproportionately raise the amount of his or her pay.
In the last year, pay for S&P 500 CEOs has risen (by some estimates up to 15.6%), yet the value of the shares of these companies actually declined slightly- despite massive expenditures of corporate funds on stock buybacks designed to increase the value of those shares. After five years of delay the SEC finally adopted rules that will allow shareholders to better understand the gap between the pay of the CEO and other employees of the corporation. The SEC is also moving forward on rules that will help expose the gap between the pay of the CEO and the performance of the companies’ shares in the stock market. Furthermore, some mutual funds and pension funds began to better exercise their fiduciary responsibility by more frequently voting down some of the most outrageous CEO pay packages.
Today more and more investors own shares through mutual funds, often investing in S&P 500 index funds. Individual investors are not in a position to sell their stakes in a company. The funds themselves are subject to a number of well-documented conflicts of interest and to what economists refer to with the oxymoronic-sounding term “rational apathy,” to reflect the expense of oversight in comparison to a pro rata share of any benefits.
Most of us learn as children that government is supposed to protect us. While the armed forces have done a good job at keeping us safe from foreign invaders, our political system seems broken. Corporations are increasingly at the real the center of power… writing our laws and playing one country off against another with regard to taxes and regulatory environment.
As I have argued for twenty years on these pages, influencing corporate governance may be a more direct way of creating a future world aligned with our own values than focusing on government alone. But how can we have an impact? Corporations do have elections, but no one usually challenges the board for their seats or other measures. Items left blank are typically counted as votes in favor of the board and its positions. The rules are tipped in favor of incumbents and most of us don’t own stock directly.
We generally only own stock through intermediaries, such as mutual funds, ETFs and pension funds. These funds are required to report how they vote each year but that’s after the fact and most people don’t know where to look to find such reports. Even if you can find them, they are difficult to compare, as many methodological notes explain in the report.
Large funds, such as Vanguard, Northern Trust, BlackRock and Fidelity have little incentive to monitor their portfolios and take an active role in challenging management and boards. Since they hold diverse portfolios, any benefit they could obtain through such actions would equally benefit competitors, while they would bear all the costs. (see my post Agency Capitalism: Corrective Measures (Part 1) Additionally, each wants to administer the deferred compensation offered by your employer. Do you think they are more likely or less likely to get that contract if they vote against your CEOs pay plan? Rationale apathy rules the day.
Overpaid CEOs: Even When Performance is Good
Don’t look to the 1% to save us. They’re sitting fat and happy with the current system. If we want the system to change, we need to pay attention to how our investments are voted. As Nell Minow said, one of our most effective personal strategies could be to use As You Sow’s annual reports on overpaid CEOs to help guide our investments and stop reinforcing high pay without high performance.
With my own individual stock investments, I generally vote against pay packages where named executive officers (NEOs) were paid above median in the previous year but I make few exceptions if warranted. According to Bebchuk, Lucian A. and Grinstein, Yaniv (The Growth of Executive Pay), aggregate compensation by public companies to NEOs increased from 5 percent of earnings in 1993-1995 to about 10 percent in 2001-2003. CEOs are important, but not that important.
Few firms admit to having average executives. They generally set compensation at above average for their “peer group,” which is often chosen aspirationally. While the “Lake Woebegone effect” may be nice in fictional towns, “where all the children are above average,” it doesn’t work well for society to have all CEOs considered above average, with their collective pay spiraling out of control. We need to slow the pace of money going to the 1% if our economy is not to become third world. The rationale for peer group benchmarking is a mythological market for CEOs.
We need to put the brakes on, even at companies were performance is good by not only voting against pay packages above the median but also the members of compensation committees recommending excessive pay packages. When directors see they can be voted out of office for recommending such packages, they will be more judicious in making awards.
Overpaid CEOs: The Top 25
Many of the overpaid CEOs are insulated from shareholder votes, suggesting that shareholder scrutiny can be an important deterrent to outrageous pay packages. A number of the most overpaid CEOs are at companies with unequal voting structures and/or triennial votes, so shareholders did not have the opportunity to vote this year on the extraordinary packages. While the say-on-pay law allows less frequent votes, shareholders have not supported the practice and the vast majority of companies hold annual votes on pay. We believe that the fact that our list of the top 25 overpaid CEOs includes several companies that do not hold annual votes on pay implies that such insulated companies are more willing to flaunt best practices on pay and performance.
The most overpaid CEOs represent an extraordinary misallocation of assets. Regression analysis showed 17 CEOs with compensation at least $20 million more in 2014 than they would have garnered if their pay had been aligned with performance.
Of the top 25 most overpaid CEOs, 11 made the list for the second year in a row. The rankings are based on a statistical analysis of company financial performance with a regression to identify predicted pay, as well as an innovative index developed by As You Sow that considers over 30 additional factors.
Keep in mind, these payments were not lifetime achievement awards. You are looking here at pay provided in a single year. David Zaslav ‘earned’ $156M in 2014but he was also paid $33M in 2013 and $50M in 2012. He’s been with the company for seven years. Discovery Communications has underperformed the NASDAQ in the most recent 1, 2 and 5 year periods. How much money does one person need? How much can one person spend? His compensation committee met 20 times last year, and this is the best deal for the company they could come up with?
Just looking at a few near the top that I happen to own myself and wondering, what did the CEO of Chipotle do to deserve so much pay while the stock was plunging and customers were frightened away by food-poisoning? Yahoo! and QUALCOMM share prices have been going nowhere for years. Were their CEOs really that exceptional? Coca-Cola is still concentrating too much on sugary sodas that are declining in sales. Warren Buffett spilled the beans when his let it out that he wasn’t happy with the pay package but didn’t vote against it because he didn’t want to make it a public issue. Maybe we need to post those signs from Homeland Security at shareholder meetings: If You See Something, Say Something.
Overpaid CEOs: Large Mutual Funds
Shareholder votes on pay are wide-ranging and inconsistent, with pension funds engaging in more rigorous analysis.
This report, representing the broadest survey of institutional voting ever done on the topic, shows that pension funds are more likely to vote against overpaid packages than mutual funds. Using various state disclosure laws, we were able to collect data from over 30 pension funds. The data shows support for overpaid CEOs ranging from approval of 24% – indicating voting practices based on rigorous compensation analysis – to 79%.
Mutual funds are far more likely to rubber stamp than pension funds, but among mutual funds there is wide variation.
Of the largest mutual funds, American and Schwab approved 65% of these packages, while Blackrock supported 97% of them. Some funds seem to routinely rubber stamp management pay practices, enabling the worst offenders and failing in their fiduciary duty. TIAA-CREF, the leading retirement provider for teachers and college professors, is more likely to approve high-pay packages than almost any other institution of its size with support level of 97%.
Directors, who should be acting as stewards of shareholder interests, should be held individually accountable for overseeing egregious pay practices. A number of directors serve on two or more overpaid S&P 500 compensation committees. We list the companies that over-paying directors serve on, and identify individuals who serve on two or more ‘overpaid’ S&P 500 compensation committees.
Take Action: If income inequality and/or wealth inequality are important issues for you, consider moving your mutual funds from overpay enablers like Vanguard and BlackRock to funds from Dimensional and Schwab. If money starts flowing out of their accounts, even huge funds will need to consider being more responsible when it comes to voting on pay packages. Of course, before you move your money, it would be a good idea to raise overpaid CEOs as an issue with them. That way, they know why you are leaving.
Overpaid CEOs: SRI Funds
Maybe like me, you hold some of your funds in Socially Responsible Investment (SRI) funds, hoping they are screening out the worst companies and voting their proxies conscientiously. Most do a better job than the largest fund families but, as you can see from the table on the left, there is certainly room for improvement among many.
One SRI fund I really like for their advocacy work is Green Century. They’re not included on the table because they abstained from all the say-on-pay votes counted in As You Sow’s survey. Sorry folks, that’s chickening out. And Parnassus, my wife and I have had investment with you folks for decades. Can’t you do a little better than 20%?
Domini, Calvert and Trillium also typically announce their votes in advance of annual meeting, so you can not only invest with them, if you own individual stocks you can also vote with them. Find their votes at ProxyDemocracy.org or through the paid subscription site ProxyInsight.com, which has a lot more data.
Take action: Raise the issue of overpaid CEOs with your SRI funds. If you don’t get a good response, move away from pay enablers.
Overpaid CEOs: Public Pension Funds
Maybe, like me, you are fortunate enough to have a public pension where members get to elect part of the governing board. Maybe you are a citizen in a jurisdiction where you get a vote on who runs the public pension, like perhaps the city, county or state treasurer.
Take Action: make overpaid CEOs a campaign issue. Ask candidates about their proxy voting policies on this vital issue. What factors do they consider? Total shareholder return (TSR)? Peer groups? Pay comparisons with other employees inside the firm? Other measures?
Ask candidates if they will agree to announce the public pension fund’s votes in advance of annual meetings. Proxy votes are considered plan assets. Plan assets must be used to enhance the value of the fund to plan beneficiaries. If they are voting their proxies with due diligence, the fund should want to influence other shareholders and how they vote. The easiest way to do that is to announce proxy votes in advance before annual meetings. Doing so is relatively simple in most cases by making public part of their web-based voting platform. Florida SBA, CalSTRS, CalPERS, Texas Teachers and Ontario Teachers are among public funds announcing their votes in advance. Funds that announce votes in advance seem to be a little more conscientious about how they vote.
Overpaid CEOs: Conclusions
Of course there are more tables and analysis in the report. Labor funds generally do a better job of analyzing overpaid CEOs than most. They included an interesting quote from Mark Orlowski, Executive Director of the Sustainable Endowment Institute (which now houses ProxyDemocracy.org):
Incredibly few universities and foundations disclose proxy voting records and the vast majority of them won’t provide the voting records even upon request…I’m not aware of any organization or entity that is involved with increasing the transparency or availability of institutional investor proxy voting records. I wish I could offer better news but I unfortunately don’t think you’ll be able to gather a significant enough sample to be able to report anything but anecdotal voting results from a handful of foundations and universities.
Take Action: When my alumni associations call, I tell them I will be happy to make a donation when I can see where our endowment is invested and how its proxies are voted.
The report also discusses proxy advisory services and compensation committee directors. On the later they include a great quote from Robert Reich:
CEOs play large roles in appointing their corporations’ directors, for whom a reliable tendency toward agreeing with the CEO has become a prerequisite. Directors are amply paid for the three or four times a year they meet, and naturally want to remain in the good graces of their top executives.
Take Action: When I vote against pay packages at individual companies in my portfolio, I almost always vote against members of the compensation committee as well, since they recommended the package. Directors are the enablers. The report quotes a Boston Globe study of one company: “Financial filings show Vertex directors awarded themselves a median of $788,000 in total compensation last year, double the median for companies Vertex identified as its peers.” Of course, such actions are more likely at firms with overpaid CEOs.
The report’s conclusion is as follows:
Everyone wants to be properly compensated for the work they do- it is part of the American dream and bedrock of the capitalist system. CEOs have a difficult job and make decisions daily that could impact millions of lives and should be reasonably rewarded for the productive contributions they make to the economy and society. However, as shown in this report, by every pay- performance measure, many CEOs are being paid entirely too much and that means the process which determines CEO pay is broken.
The Dodd-Frank act gives shareholders the right to cast an advisory vote on excessive CEO pay packages that misalign the incentives of executives and owners by voting against these plans and withholding votes for the members of the board’s compensation committee. Shareholders need to use this right to make a statement that they want change. In addition, mutual fund owners and pension fund contributors must hold their funds managers accountable and insist that their representatives also exercise this right rigorously.
Members of the boards of directors, many who are CEOs or former CEOs themselves with potentially shared interests in high- pay, have a complicit role in escalating compensation. These directors may not actively collude to increase or even maintain such high compensation levels, but the effect is often the same as if they had.
Beyond the web of cronyism amongst those responsible for deciding and approving pay packages, this report shows that there is little alignment between pay and performance. Overall, these practices promote an unsustainable system. Too often CEOs have received windfalls based on purely external factors. Many metrics that drive pay are short-term (even those considered long-term are typically for three years or less), and provoke decisions with negative long-term impact (from financial engineering to underinvestment in growth).
They also include recommendations:
- Shareholders should make sure their assets are voted wisely.
- Mutual fund owners and pension contributors must hold their fund managers accountable.
- Shareholders must hold board directors accountable.
CEO compensation as it is currently structured does not work. From the executive summary:
Paying one individual with excessive wealth unrelated to incentives or results creates a false narrative that such compensation is justified and earned. It undermines essential premises of capitalism: the robust ‘invisible hand’ of the market as well as the confidence of those who entrust capital to third parties.
Please heed my “Take Action” advice provided above. Don’t count on someone in an expert or elite position to solve this problem. It will only be solved when we all start paying more attention. It all boils down to individual actions, even if most such actions are coordinated through groups.