Are we paying CEOs too much? Is the Pope Catholic? (That’s my own bad joke, not from the panelists.)
Executive compensation is front and center on the minds of shareholders, regulators—and politicians. What IS pay? What IS performance? What are the right time frames for measuring performance? And what to do about the perception that pay is not tied to performance?
I was less interested in our “perception” that pay is not tied to performance and more interested in the reality, where such discrepancies exist.
Are We Paying CEOs Too Much? is Part 5 of my coverage of the Corporate Directors Forum 2017 in San Diego @, which was billed as Directors, Management, & Shareholders in Dialogue. I was also hoping to learn more about President Donald J. Trump and how his administration might impact corporate governance. More about that in a future post. See Part I, Part 2, Part 3 and Part 4. As usual, the Directors Forum was under Chatham House Rule, so I’m mostly just posting a few observations and my reflections that I hope readers will find interesting.Much better photos from the professional photographer at Directors Forum 2017 Photo Slide Show.
Are We Paying CEOs Too Much?
- David Chun, Founder & CEO, Equilar, Inc. (Moderator)
- Ric Marshall, Executive Director & Senior Research Analyst of Corporate Governance, MSCI | ESG Research
- Michael T. Esser, Managing Director, Pearl Meyer & Partners [Check out this video I stumbled upon.]
- Neil Kurtz, MD, Compensation Chair, Medidata Solutions, Inc.; President & CEO, Golden Living; Director, TeamHealth
- Outside the U.S., female CEOs were still typically awarded less than male CEOs.
- Among U.S. companies, over the last 10 years women on average were awarded higher annual Total Summary Pay (the amount booked by companies as CEO compensation) than men but ultimately took home lower annual Total Realized Pay (which factors in gains from the vesting of stock and option awards granted in prior years).
- Male CEOs in the U.S. were awarded stock options more often than female CEOs. The grants also were worth more on average. This largely held true even between male and female CEOs of the same companies.
- While 2015 results in the U.S. suggest a possible shift toward total earnings parity for female CEOs, inequalities persisted in how underlying package components were awarded.
Companies with the most conservative pay plans outperformed those with more aggressive plans… looking at target values. Followup report looked at actual payout. 90% are doing a good job of aligning pay with performance. 10% not correlated and some of those are big companies. Say-on-pay had a 2% rate of failure. MSCI looked at 40 companies with unaligned pay to see how they did on say-on-pay.
Being in touch with investors is critical to help predict outcome of say-on-pay vote. Not being defensive but be willing to listen is key. Meeting with investors to go over pay plan can be helpful. Listen and you might actually make changes, like adding claw-backs, if you don’t already have them.
Examples provided of pay metrics that were problematic because they were too discretionary. Investors more likely to oppose. These can be solved with more formulaic application and better disclosure.
Exxon Mobil – unique pay philosophy. Long-term capital commitments over 30 years. Structured 50% vested at 5 years. The other 50 at 10 yrs(?) or retirement. Internal CEO candidates help address alignment because if you bring in outside CEO it often does not fit with internal pay metrics.
Panelists expect more matching programs to get execs with more skin in the game. Companies are adding holding requirements after vesting. However, totally algorithmic pay is problematic. Boards should be able to ratchet payout down, even if metrics met.
Readers might also be interested in reading Naming and Shaming Overpaid CEOs, assuming companies and boards do not want to wind up at the top of Rosanna Landis Weaver’s annual list of the “100 most overpaid CEOs.” As the head of the executive compensation program at the shareholder advocacy group As You Sow, Landis Weaver has become a leading namer and shamer of the country’s most undeserving chief executives.
From their report:
…not only does the group of 100 most overpaid CEO companies of the S&P 500 underperform the S&P 500 by 2.9 percentage points, but the firms with the 10 most overpaid CEOs underperformed the S&P 500 index by an amazing 10.5 percentage points and actually had a negative return, reducing the actual value of the companies’ shares by 5.7 percent. In summary, the firms with the most overpaid CEO’s devastated shareholder value since our first report published in February 2015.
When that happens, it just looks bad all around. Hopefully, those who attended the 2017 Forum structured their compensation packages better than most.