CalPERS Votes Against Pay at 1,195 Firms

CalPERS Votes Against Pay at More Companies Than Ever

CalPERS votes against pay at 53% of companies during 2019 proxy season, truly setting an example with regard to stewardship around executive pay. That is up from 43% last year. I would be interested in an update of last year’s graphic (S&P 500 only, as above) on pension funds most likely to oppose CEO pay. (See The Most Overpaid CEOs: Are Fund Managers Asleep at The Wheel?)

Equilar announced, in partnership with CalPERS, the release of the CalPERS P4P Scorecard in Equilar Insight, the leading executive compensation benchmarking software solution. The release of the new scorecard is an extension of the five-year realizable pay calculation CalPERS and Equilar released earlier this year. Said Simiso Nzima, Investment Director & Head of Corporate Governance at CalPERS:

We introduced our proprietary five-year quantitative pay for performance model in March 2019. Today we introduce our CEO and Shareholder Financial Outcomes Analysis to enable us to compare the financial experiences of the CEO to those of shareholders, over a five-year period.

CalPERS, the largest US pension fund which manages more than $380 billion in assets, has already started implementing its new compensation framework. In an effort to drive more accountability and improved pay for performance alignment, CalPERS reports voting against 53% of compensation plans at portfolio companies during the 2019 proxy season. Additionally, CalPERS posted its Executive Compensation Analysis Framework on its website to provide total transparency to its portfolio companies regarding its pay for performance evaluation.

Said David Chun, CEO of Equilar:

We’re proud to be CalPERS’ trusted data provider. It’s a tremendous benefit to our clients to provide the new five-year analysis and scorecard. We’re offering additional transparency and insight on how CalPERS will evaluate pay for performance. Issuers are listening. We’re seeing interest and adoption extend to the broader investor community as well.

CalPERS P4P Scorecard

The CalPERS P4P Scorecard calculates a CEO’s realizable pay over a five-year period and compares the gain to that of shareholders over that same timeframe. The resulting score indicates how well aligned, or misaligned, pay is with performance. According to Chun:

We’re enhancing our Pay for Performance module by providing an apples-to-apples, longer-term realizable pay comparison across industries and peer groups. The addition of the scorecard now allows issuers and investors to easily identify the delta between CEO gain and shareholder gain allowing for more consistency and transparency through the engagement and voting processes.

A critical element for CalPERS is the extended evaluation timeframe. The longer term view better aligns with long-term investors and reduces the impact of market volatility. “We use a long evaluation period—five years—to encourage a long-term focus by company executives,” says Nzima.

The scorecard is one part of a two-part pay evaluation process. CalPERS uses the new quantitative analyses to identify potential pay alignment issues. A thorough qualitative analysis is conducted to better understand the composition of pay plans that yield higher misalignment scores.

The new analysis is meant to drive more accountability and curb outsized CEO pay when shareholder returns are flat or decreasing. According to Nzima:

We have no problem with company executives being paid well if investors are also paid well at the same time. What we are against is value accruing to executives while no value accrues to investors over the long term. If we find that the only value being generated over the five-year period is for executives, we will vote against both the compensation plan and compensation committee members.

CalPERS Votes Against Pay: My Take

I am delighted to see CalPERS votes against pay where not aligned with shareholder value. However, I would go further. I generally vote against pay packages where named executive officers (NEOs) were paid above median in the previous year, even where pay and shareholder returns align. I do make rare 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.

Few firms admit to having average executives. They generally set compensation at above average for their “peer group,” chosen by aspiration. 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. For more on the subject, see CEO Pay Machine Destroying America.

Government bonds from countries like Germany, Japan, France, Sweden, Denmark, and Switzerland now have negative interest rates. There are approximately $16.5 trillion dollars of bonds outstanding that pay you back less than you put in. The US is suffering an inverted yield curve and is also approaching zero interest on Treasuries. Because of the wealth divide, there is too much money chasing too few investments and not enough being spent on productive uses like the Green New Deal.

CalPERS Votes Against Pay at Following 1,195 Companies

When we file shareholder proposals at these companies, it might be helpful to include a reminder that CalPERS and many others voted against pay as unaligned with shareholder value.