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CEO pay grew an astounding 943% over 37 years, from 1978-2015, vastly outpacing growth in the cost of living, the productivity of the economy, and the stock market.
The third report in the series,
The 100 Most Overpaid CEOs: Are Fund Managers Asleep at the Wheel?
highlights the forces behind disproportionate pay and the fund managers who continue to approve these pay packages.


Will New Pay Ratio Disclosure Lead to “Public Infamy?”

Doing background reading as we prepare for new pay ratio disclosure I ran across a wonderful Alexander Hamilton quote: “Public infamy must restrain what the laws cannot.”

This Hamilton quotation was cited to make a corporate governance point in “Money for Nothing: How the Failure of Corporate Boards is Ruining American Business and Costing Us Trillions.” That book on executive compensation, by John Gillespie and David Zweigate, was published in 2010, well before one could imagine that a biography of Hamilton would be turned into a hip-hop Broadway hit. Now with the man and the musical all the rage there’s a new opportunity to consider Hamilton’s wisdom. The quotation comes from letter written in the late 1700s in a reference to a financial scandal of the time in which board and CEO malfeasance resulted in the financial collapse of the Society for Establishing Useful Manufacturers.

I was revisiting “Money for Nothing,” as well as Sam Pizzigati’s excellent “Greed and Good: Understanding and Overcoming the Inequality That Limits Our Lives” and “The CEO Pay Machine” reviewed here because the new compensation disclosure of pay ratio between the CEO and that of the median worker at the company begin with proxies filed in early 2018. The information on CEO pay is not new to shareholders, but the ratio will highlight a remarkable differential, and likely incite some public infamy. Here’s some context.

This discussion of how much leaders should be paid in comparison to their workers is an old one, as pointed out  by former compensation consultant Graef Crystal, “Plato told Aristotle no one should make more than five times the pay of the lowest member of society. J.P. Morgan said 20 times. Jesus advocated a negative differential–that’s why they killed him.”

Note that these leaders were not advocating for disclosing a pay ratio but for setting one. Eleanor Bloxham, a long time governance observer noted that, “Back in 1977, Peter Drucker wrote that CEO pay should be no more than 25 times average worker pay. In a 1984 essay, he updated that to say that no more than 20 times average worker pay was appropriate.”

Others proposed ratios for pay suggest comparisons not to worker’s wages but to other financial data points. Edgar S. Woolard Jr., Chairman and CEO of DuPont from 1989 to 1995, once suggested limiting CEO’s pay to 1.5 times what the executive running the company’s operating units received.

For much of American history pay at the top grew approximately at the same rate as that of the worker. That, as many of you know, changed remarkably in the past quarter century now at nearly 300:1 in the United States.

In a powerful speech given at Trinity Church the former Vice Chairman at Merrill Lynch, then CEO of the Federal Reserve bank in New York called for an end to excessive CEO pay, and questioned the extraordinary increases. William J. McDonough noted, “I am old enough to have known both the CEOs of 20 years ago and those of today. I can assure you that we CEOs of today are not 10 times better than those of 20 years ago.”

Nor did they work ten times as many hours. Graef Crystal separately pointed out that the increase wasn’t related to supply and demand. Nor are they several times more valuable than the CEOs in other developed countries where pay ratio is estimated to be much lower (12:1 in Germany, 11:1 in France in 2012 according to David Bowles.)

Shareholders and citizens were not pleased. Articles on compensation excesses became frequent. Public infamy did place restraints on some element of pay (perquisites on the whole are less egregious than they once were).

But pay continued to go up.

In 2011, under provisions 951 of the Dodd-Frank Act Wall Street Reform and Protection Act, shareholders first gained the right to vote on pay packages. When a significant number of shareholders vote against packages boards listen. As I noted in a series of blog posts I did this summer, many companies made changes in practices and others reduced pay following high levels of opposition to pay packages. The total disclosed compensation (TDC) of Salesforce Chairman & CEO Marc Benioff declined from $39.9 million for FY 2015 to $13.1 million for FY 2017. After Honeywell heard from shareholders a preference that long-term performance awards “be share-based instead of cash” they made changes that resulted in a TDC decline of 47%. CEO pay as disclosed in the proxy statements declined by 40% at Regeneron and Vertex after low levels of shareholder support. Many other companies made smaller changes.

The utilization of this tool is one thing we study in As You Sow’s annual report “The 100 Most Overpaid CEOs: Are Fund Managers Asleep at the Wheel?” In a few months we’ll be releasing our fourth report on how mutual and pension funds vote on excessive packages and while many funds have markedly increased levels of opposition to packages over the past four years, there still remain some who appear to approve almost automatically.

The voting tool would be more effective if more shareholders voted less obligingly with management. The average level of support on pay proposals at S&P 500 companies is well over 90%.

Another provision of the Dodd Frank act also signed into law July 2010 was section 953b, which calls for the ratio disclosure. Corporations and their lobbyists fought this disclosure with every tool in their arsenal. The rule making dragged on until the SEC finally passed a version of the rule in 2015. (There are other element of Dodd-Frank that were never finalized and may never be.)  Republicans in the House had promised legislation to overturn it even before the 2016 election meaning that there is a chance that this information will only be available for one year.

While pay increased exponentially at some companies, there were others who chose to keep deliberate limits. Often these are companies weave larger social issues into their missions and many continue to maintain the caps to this day. Dr. Bronner’s, a soap company, notes on its website that it “caps the total compensation of the highest-paid employees and executives at five times that of the lowest-paid

Ben & Jerry’s ice cream began with a cap on executive pay of no more than five times that of lowest paid employee in its early days. As the company grew, the ratio increased to seven and then 17 to one, which it held until the company was bought by Unilever in 2000.

Whole Foods began with a salary ratio of eight to one in the 1980s, and raised to 14 before the company went public in the early 1990s. The company increased the multiplier again to 19 times average workers’ pay in 2006.

Sometimes the fact that these ratios moved upward over time is used contend that a defined ratio is difficult to maintain. As a counter point I’d suggest reading John Mackey’s essay “Why sky-high CEO pay is bad business” which appeared in the Harvard Business Review in 2009. He noted that having a cap had not presented a problem to the company. “Whole Foods has never lost to a competitor a top executive that we wanted to keep since the company began more than 30 years ago.” He also explained that employees cared about pay equity issues and that Whole Foods found that a smaller gap made for a happier workforce with better performance results.

Whole Food’s 2007 proxy statement explains that the company keeps compensation “not so high that it creates a negative perception with our other stakeholders.”

There’s plenty of negative perception about CEO pay packages in general, however. According to a 2016 survey by Stanford’s Rock Center on Corporate Governance found that nearly three-quarters of those surveyed thought that CEOs were paid too much relative to what workers received.

As noted before, CEO pay has continued to rise sharply in the years since Mackey said a pay cap was not an impediment to hiring. Perhaps greed and executive entitlement have increased markedly since 2009. Still, it is worth recalling that an arbitrary limit of 17:1 was not a problem less than a decade ago as you see ratios of over 170:1 in 2018.  I expect to see an astonishing range of data come out on pay ratios this year. The SEC has given companies broad discretion on how to calculate the data, and broadened it even more with additional interpretive guidance in September. Because the data will be variable it will make it more difficult to compare company to company, within industry, or by size. That may backfire on those that hoped to add complexity to cloud data comparisons. The overall ratio will stand out even more glaringly.

Perhaps public infamy – which should be focused on the directors who design the packages, the shareholders that approve them, as well as the executives themselves – may yet restrain what this disclosure will now clearly illustrate. In 2015, SEC Commissioner Gallagher, in his opposition to the rule wrote of “perceived income inequality” in the same tone that others in his party write of “purported climate change.”  In both of these matters, numbers don’t lie.

Words are not Enough

This summer I’ve written a series of blogs on compensation changes disclosed this year, including some positive and significant reforms. However, many of the changes I read in proxy statements this year struck me as being what Mary Poppins called, “piecrust promises: easily made and easily broken.” There was consistently more PowerPoint style than employment agreement substance.

Whether the change was big or small the language was always grand. Mylan, the company with the lowest vote of the season, had language of reform in its proxy: “Based on . . . extensive shareholder engagement, as well as the Mylan Board’s own independent analysis and initiatives, we have implemented numerous robust compensation-related policies.” They had implemented some changes, but Mylan didn’t listen to shareholders overriding concerns, entering into what investors described as a “third new and excessive employment agreement” with Robert Coury.

Bloomberg’s Anders Melin reported that seven S&P companies have failed CEO pay votes this year, more than in the prior few years. What can these losses tell us about compensation reform in general?

The first lesson, that improved disclosure will no longer appease shareholders, is good news. Dressing up a bad plan with a pleasing PowerPoint only takes you so far. ConocoPhillips shared with its shareholders multiple defenses of its pay, without persuading the majority of shareholders to support the plan. The changes the company had made were minor and insufficient to satisfy shareholders in the face of the company’s outsized compensation.

Another lesson, however, is easy to miss. When investors take the time to deeply research and then highlight issues, it appears shareholders are more willing to oppose them. However, the cases where such a deep dive is conducted appear to be minimal. Of companies with failed advisory votes this year several were at companies where shareholders shared their expert analyses on publicly filed SEC postings. Mylan was the highest profile such case, with an effort that included New York City Comptroller Scott M. Stringer, on behalf of the New York City Pension Funds; New York State Comptroller Thomas P. DiNapoli, the California State Teachers’ Retirement System, and PGGM.

FleetCor Technologies also faced a campaign in opposition to its compensation led by an investor, CtW Investment Group, who put in extensive research and filed its critique of the company publicly at the SEC. Subsequently the company lost its second advisory vote in a row.

Southern Company received support of less than two thirds of votes cast on its advisory vote after investors critiqued pay at the company.

The Teamsters’ analysis of McKesson shined a light on one issue in particular that might easily have been otherwise overlooked. The company had been through a series of reforms following other low votes. In its critique of compensation this year the Teamsters highlighted the fact that the company eased away from a TSR units, after they failed to perform. Going forward, rather than just relying on TSR compared to peers, the so-called TSR units now include “three-year Cumulative Adjusted EPS” as a factor. This is the sort of change that would be easy to skim over in a proxy statement, and yet it represents a retreat on prior commitments. To identify this, the analysts needed to read not just the current proxy statement, but prior ones, comparing prior disclosure, benchmarks and outcomes. The finding at McKesson underlines the fact that compensation programs deserve close and specific attention that may be beyond the capacity of some investors, and the will of many more.

Complicated performance-based plans are more common than ever, and messing with metrics can keep compensation consultants fully employed indefinitely. Whether it is ultimately in the best interests of shareholders is another question. Perhaps it is time to consider what is accomplished by the fine tuning and retuning of goals. Steve Clifford in The CEO Pay Machine: How it Trashes America and How to Stop It writes: “All pay-for-performance systems cause more harm than good. They generate perverse incentives, undeserved and often absurdly high bonuses, and damage the companies that use them.”

Performance share units may be an improvement over stock options. However, they are also less straightforward. In years past companies caused the wrath of shareholders to rain down upon them by repricing stock options. That practice, reasonably easy to discover, has essentially been eliminated. Egregious changes going forward, however, are likely to be much more subtle, and easier to miss. A few words in the proxy regarding modifying PSUs or accelerating vesting under certain conditions could mean a windfall for an undeserving executive. By the time the windfall has been received it will be too late for shareholders to take action.

Another example of a piecrust promise: vows to use less discretion. I read many companies who heard from shareholders about frustration with discretion and proudly noted that they had not used discretion this year. Others who heard from shareholders about a particular grant responded that “we have no intention” of using such grants in the future. Whether these companies will honor this intention requires watchfulness.

Engagement seems to be the best beloved word of both boards and institutional investors. On August 31, Vanguard released its Investment Stewardship 2017 Annual Report which noted that executive compensation was a topic at 55% of engagements. Without minimizing the good that can be and has been accomplished in conversations, it is impossible to know what engagement means. If engagement means sending a junior staff member to listen to a company extol its plans in mind-numbing and confusing detail, it is essentially useless. Vanguard has one of the lowest levels of opposition to pay of any of the funds we’ve examined. Even discussions of substance ring hollow when there is no follow-through. Engaging without vigilance and consistent follow up is insufficient. Engagement without a real possibility of voting in opposition is practically meaningless.

Pallid Responses to Pay Votes

While there are companies that make true changes to compensation there are others whose response to shareholders seems minimal at best.

As I noted here there were 16 companies where CEO pay declined by 20% or more according to the New York Times analysis. The number of companies where pay increased by 20% or more was 56, and of those 21 had pay that increased more than 100%.  Among those where pay increased were several companies who had fairly low levels of support that prior year.

Activision Blizzard took action to lower the CEO’s salary (effective January 1, 2017) and eliminated an automatic salary increase in his employment agreement in response to two years of support below 70%. However, pay was up sharply – largely due to a stock award valued at nearly $25 million dollars.

Pay for the CEO of Freeport McMoran nearly doubled despite the fact that less than 60% of shareholders had supported it the prior year. The company had made changes to director compensation, amended its by-laws to adopt proxy access and adopted a new structure for performance share units. The company notes that target value of PSUs doesn’t match that disclosed in the summary compensation due to accounting rules, and if ultimately true that may account for some of the variation. However, in addition, the company awarded a non-performance based bonus of $1 million as well as NEIC of $1.385 million.

Compensation for Pentair’s CEO increased by 51% even though less than 72% of shareholders had approved the vote the prior year. In the proxy statement the company wrote, “In April 2016, one proxy advisory firm recommended that shareholders vote against approving compensation . . . .As a result of this disappointing recommendation we reached out to shareholders to gain additional insight and to provide them with clarifying information enabling them to make an informed decision on the say on pay vote.” Note here the implication of the phrases “as a result of this disappointing recommendation.” It suggests one of the clear benefits of say on pay (increased outreach) as well as who companies incorrectly blame for low votes (proxy advisors).

TDC for Chipotle’s CEO increased 13% from the prior year despite the fact that it had made a number of positive changes to its compensation practices in the past few years following shareholder engagement. In discussing the vote Chipotle noted that, “We believe [vote] result was primarily due to our disappointing business and stock price performance, but members of the committee also continued to engage with shareholders to understand what drove the vote result.” It is true that the impact of changes to long term incentives may require a few years to be seen in the summary compensation table.

Several of the companies blamed low votes on one-time awards. FMC noted in its proxy statement that “The Committee now recognizes that rationale [for a one-time equity award] and decision-making process were not fully articulated in our 2016 CD&A.” Despite the low vote, changes did not substantially effect Total Disclosed Compensation (TDC). The CEO’s TDC declined from $11 million to $10 million, but remained nearly double what it had been in in 2014.

Cliff’s Natural Cliff’s Natural Resources learned through engagement that, “Large, one-time retention grants are not preferred.” One wonders how board members were unaware of that straight forward truism.

Schlumberger also learned a lesson that should have been self-evident, “Many stockholders we engaged with disapproved of the Compensation Committee’s exercise of discretion when it awarded our executives 100% payout under the performance stock unit (“PSU”) awards that vested in 2016, when the actual performance results called for an 81% payout.”

Another interesting contrast I found as I read through these statements was the language companies used in describing interpretation of support. CVS’s pay vote, for example, received support from approximately 80% of votes cast. The company wrote, “This was lower than the support received in 2015 (94% in favor). During the fall of 2016, we contacted our 50 largest stockholders, holders of more than 50% of our common stock, to get their views.”

On the other hand AON considered the support “approximately 80% of shareholder votes cast” sufficient. “Accordingly,” they note in their proxy statement after disclosing the vote, “the Compensation Committee made no changes to our executive compensation programs as a result of such vote.”

Bonus Parody: What if We Talked About Diet Plans Like We Talk About Comp Plans

It’s a hot August Friday. I’ve read through hundreds of pages of dense CD&A language in proxies. And I find myself wondering: what if we talked about our diet plans the way companies talk about their comp plans. Here’s my take, based on the format I’ve seen many companies use as they congratulate themselves for changes they’ve made to compensation.


The scale has spoken and I listened. I recognize that [number intentionally left blank] is an unacceptably high weight. Through meeting with you all, I have learned that the primary reason for recent weight gain has been the consumption of too many calories. Some have also suggested exercise.

What I’ve heard: You are eating too much.

Response: I’m consuming the same approximate number of calories as others, but will carefully monitor this issue. I will continue to maintain rigorous goals, with exceptions at my discretion. The award of supplemental desserts will be limited to extraordinary circumstances.

I’ve also made other adjustments. Going forward I plan to move to drinking diet rather than regular soda. You should all be very proud of me.

What I’ve heard: There have been excessive meals.

Response: I will commit to not consuming more than 4,000 calories in a single setting.

In addition, beginning in 2019 a significant portion of the food I eat will be vegetables.

What I’ve heard: You need to adjust your eating habits to your size and age.

Response: My peer group is entirely appropriate. While I am not currently a player for the NFL I hope to someday be one. Calorie consumption will give me the strength I need for training that I am about to undertake any day. Therefore, those athletes in my peer group can be considered aspirational peers.


Of course this is all silly, a transparent defense of bad habits; but then so is some of what I read in proxy statements.

And remember, what is true for weight is true for compensation as well. It is much easier to never put it on than in the first place than to try to take it off.

Companies adopting compensation best practices; getting rid of the worst ones

Last week I looked at companies who made positive reforms on pay (see here, here & here). It was sort of the feel good, “Say on pay is a success” story. I think that fundamental assertion is true.  Yet there are significant caveats and limits to those successes. I begin the “bad news” series with a look at companies whose changes were less inspiring, either because they just got around to making changes others had made in the past or because they eliminated practices they never should have had in the first place.

Many of the changes were smaller companies eliminating practices that companies in the S&P 500 eliminated soon after shareholders gained the right to vote on pay. I counted 26 companies that eliminated gross-ups (company payment for executive tax after change in control parachutes) and/or added or made changes to how equity would be treated following a change in control. (Important side note: performance grants are only truly performance based when they ONLY vest when criteria met.)

I tracked 10 companies that made changes to peer groups, 10 that increased their holding periods, and seven that adopted or improved their clawback policies.

Then there were the companies that eliminated practices they should not have had in the first place.

General Growth Properties – “Our Compensation Committee adopted a formal policy prohibiting guaranteed minimum bonuses in future NEO employment agreements.” The phrase “guaranteed minimum bonuses” tells you pretty clearly these aren’t in any way performance-based bonuses. The company also adopted a formal policy that future executive equity awards will not be 100% time-vesting.

Natural Gas Services – “The Compensation Committee approved a new framework for our long-term equity compensation. Equity awards now vest in one-third increments over three years.” Previously the company had awarded one-year restricted stock which is absurd to define as long-term.

Superior Industries “Modified our CEO’s employment agreement to eliminate the guarantee of annual time-based equity awards.” That is a contractual change, so more significant than others.

Several companies, including Tessero; Exelon; Bed, Bath & Beyond; and Verifone, adopted policies that cap certain future payouts. These particular payouts, generally relating to performance shares, were capped at target if there is “negative absolute TSR for 12 months.” Capping payments sounds good but note that even if shareholders lose money over the course of the year executives can achieve 100% of their bonus. In some cases this change was necessary because before it was made some of these executives could have received more than 100% of target in a bonus even with a stock price decline.

It is great that that these changes were made but it brings up a challenge familiar to educators: how does one respond to good faith efforts of improvement? There is reasonable tendency to want to reward effort to encourage further improvement. But if someone worked hard to address the cause of a failing grade, they should not be given an A or a B. (This has led to grade inflation, something outside my purview but not my interest).

Voting of course is binary: yes or no. I believe the desire to reward even incremental changes is one reason that we’ve seen an average increase on level of support for pay. Analyzing compensation is very time consuming so it is simpler to look for red flags. For the past several years many of the votes have reflected an attempt to get more companies to adopt best practices, or at a minimum eliminate the most egregious outliers.

Improved support levels at particular companies do not mean that shareholders are happy with the system, structure or stratospheric amount of pay generally. That misinterpretation is frequently made by one compensation consultant in particular. The increased level of votes often means companies with the worst practices have been rewarded for conforming.

That’s a good place to start, but by no means the end of the journey.

Pay Reduction and Negative Discretion

I’ve written about two sets of companies that have made positive changes to their compensation practices: those where CEO compensation went down by more than 20% and those that made solid changes in the face of low shareholder votes. I’ll be blogging next week on some less than solid changes and highlighting more recalcitrant companies. When I did some searches for the terms “negative discretion” many proxy statements noted compensation plans that included language allowing for negative discretion. But I found few examples of companies that utilized that ability. Here are some companies (in addition to a few of those in prior blogs) who made true reductions:

Manulife/John Hancock annual report: “After shareholder support for our approach to executive compensation declined from 91 percent in 2015 to 77 percent in 2016, I pledged at the annual meeting to review our program and take action to meet shareholder expectations…Subsequent months of meetings with management …resulted in seven significant changes…I would like to thank all of those that participated, especially our CEO who voluntarily accepted a reduction in his compensation…”

Capital Senior Living: Although the annual bonus based on prescribed metrics was earned at near target for the CEO and CFO, “the Committee decreased the actual annual incentive payout for the CEO and CFO by 30% to acknowledge the broader industry downturn and its impact on our financial performance and our total stockholder return. In addition, to further align executive compensation levels with shareholder feedback and the market as reflected by our peer group the Compensation Committee adjusted 2017 LTI target pay levels downward.”

Tetra Technologies – As part of the company’s cost reduction efforts, “In February 2016 the Committee approved a 10% reduction in the base salaries of all of our NEOs employed by TETRA, and in May 2016 the Committee approved an additional reduction in the amount of 10% of the previously reduced base salaries of our NEOs employed by TETRA.”

I would welcome other examples and will happily add them to this blog.

Low pay votes lead to real pay changes

Voting on executive compensation is an important and powerful fiduciary duty for pension and mutual funds. Our annual report on The 100 Most Overpaid CEOs has shown that some funds simply rubberstamp pay packages, but those who take voting responsibility seriously make a real difference.

Engagement has increased dramatically since advisory votes were required in 2011. In proxy statement after proxy statement this spring I read about outreach to shareholders. Again and again I saw two-column charts: “What we heard” “How we responded.” When season died down I looked at dozens of proxies. Some of those responses were rather paltry – more on those in an upcoming blog – but many were of substance. In my last post I wrote about companies where CEO compensation fell by 20% or more in one year. Today I’m looking at actions taken in response to low levels of support.

First, an overview. Of the companies I looked at 45 made changes to their performance share programs, either expanding them or adjusting them in some way. The trend away from options and time based restricted shares continues.  Twenty-two companies set caps and/or reduced the maximum and target of future bonus awards. This means that there should be fewer astonishing upside surprises. The removal or decrease of discretion was a theme that shareholders raised and companies responded to as well. I tracked at least 13 companies that explicitly lowered the ability to use discretion in granting awards.

Here are some other examples of large companies that made significant changes.

Exelon took a number of strong actions following its failed say on pay vote last year. It eliminated a discretionary “individual performance modifier.”  Exelon made significant changes to its metrics: eliminating overlap of metrics in various plans and responding to shareholder opinion on which metrics were more appropriate in annual vs. long-term pay. The company also moved PShare performance periods from annual to 3-year through a phased-in process.

Goldman Sachs had a Long Term Incentive Plan (LTIP) with payouts that tended to surprise on the upside. Most recently, former President Gary Cohn received a cash payment of nearly $47 million for prior LTIP awards when he left Goldman Sachs to join the Trump administration. But shareholders had been raising concern on this plan for years before that payout. The company has made some changes; beginning in 2014 they agreed to eliminate compensation committee discretion to adjust final payouts of new LTIP awards. In 2016, ISS & Glass Lewis both recommended against the pay package and approximately one third of votes were cast against it. Finally this year, after continued discussion with shareholders, Goldman discontinued its LTIP forward-looking cash awards.

Borg Warner was one of those rare companies (a few more in next blog) where CEO accepted actual cuts. Specifically, “The Committee and the CEO agreed to reduce his earned 2016 annual incentive plan award by $2.43 million (71%) from $3.38 million to $0.95.” The company also changed its benchmarking practices for target awards from the 65th to the 50th percentile.

BB&T was another company that made significant changes, including one retroactive one. In June 2016, the company “retroactively added Total Shareholder Return (“TSR”) as a payment modifier that can decrease payments under the previously granted 2016-2018 LTIP awards based on BB&T’s TSR performance relative to its peer group.” The company eliminated stock options and increased its reliance on PSUs. In addition the company increased its stock ownership guidelines for its CEO and strengthened its clawback policy.

Expeditors International was one of many companies that moved to performance share units to increase alignment. In 2016, 76% of the CEO’s pay was delivered in cash; the company estimates that in 2017 the cash percentage will fall to 60%.

Verifone also received shareholder feedback regarding excessive discretion in its pay plans. Following a failed say on pay vote the company “eliminated the potential for subjective upwards discretion in the form of qualitative adjustments of up to 20% that previously could increase short-term incentive payouts” beginning in 2016.  “Beginning in fiscal 2017, we have replaced the individual performance portion of the short-term incentive plans with objective, quantitative corporate strategic goals that will be established at the beginning of each fiscal year.” The company also placed a cap on maximum payout of both short term and long term compensation components.

Bed, Bath & Beyond received support of only 22% of shareholders at its July 2016 vote and has made changes that brought compensation down each of the last two years, though they were not enough to satisfy shareholders. Changes made in 2016 included the adoption of two-year post-vesting holding period for the CEO of shares acquired on vesting of 2017 PSUs. This results in a reduction in the value of CEO equity compensation as reported on the summary compensation table of approximately $1.35 million. The company has reduced compensation targets, reduced director compensation and made adjustments to its performance share units. For all the changes, however, the CEO continues to receive an exceptionally large salary of almost $4 million dollars.

CEOs whose pay decreased

This summer I looked at disclosure in over 100 proxies regarding changes made to compensation packages generally as a result of low votes and/or shareholder outreach. I expect to write several blog posts on this, but begin today with cases where pay declined significantly.

In late May the New York Times made public its executive compensation database of 200 of the highest paid executives for the prior year. There were sixteen companies where total disclosed compensation (TDC) declined year over year by 20% and almost all of them had received weak support for their advisory votes in the prior year. Of the companies in this list that were on the top 50 of As You Sows most recent overpaid CEOs, 16 had reduced TDC, and only 4 had increased pay. Overall, however, the New York Times showed the vast majority of executive compensation increased.

Here’s a review of cases where pay went down.  Changes may be a direct result of policy changes, including many based on shareholder suggestions, or may be an outgrowth of declining performance. Also, some of the companies listed below were not on the New York Times list, but identified elsewhere.

Salesforce Chairman & CEO Marc Benioff’s total reported compensation declined from $39.9 million for FY 2015 to $13.1 million for FY 2017. The most recent one year decline was 60%. Despite a smaller decline the prior year (16%), less than two-thirds of shareholders approved compensation that year, which spurred addition changes. The company noted in its proxy: “We take seriously, and believe it is important to respond to, the voting results on our annual stockholder advisory vote to approve our executive compensation.” The company has frozen CEO Benioff’s salary through 2018, adopted performance based share units (PSU), and announced perks it plans to eliminate in 2018.

Honeywell, where TDC declined 47%, heard from shareholders a preference that long-term performance awards “be share-based instead of cash.” In the case of Cote’s 2016-2017 Growth Plan award, “the [compensation committee] retroactively changed the form of payout from cash to shares.” The company is transitioning compensation from discretion-based “to a more formulaic plan,” from stock options to performance share units, and has lengthened performance cycles.

Regeneron’s CEO’s TDC fell by 40%. Regeneron has been in discussion with shareholders for several years, and the proxy statement disclosure highlights changes made in 2013 and 2014, as well as those made more recently. A gradual change that ultimately had a great effect on bottom line numbers was consecutive decreases in size of equity awards to executives.

Vertex, where pay was also down 40%, noted that pay was supported “by 74% of the “Say-on-Pay” advisory votes cast by our shareholders in 2016, which was a significant increase in support compared to 2015.”  Vertex made changes in equity awards, including performance-contingent restricted stock units. The board “approved annual cash bonuses at above target levels for 2016, but at significantly lower levels than those granted in 2015.”

SL Green, where pay declined by 25% made several significant changes. Among them changes to peer group, providing “only performance-based employment agreement equity awards for our Chief Executive Officer’s 2016 employment” and raised performance hurdles.  The annual bonus, which had only been 60% formulaic in 2014 is now 100% formulaic. As the company notes, these changes made a significant difference, “The rigorous application of our pay-for-performance compensation principles resulted in the formulaic annual cash bonus program for our top three executives being earned at only 61%, and a reduction of our CEO’s total annual bonus by $250,000—4% below 2015 and 16% below 2014.”

Universal Insurance Holdings introduced a performance threshold to its cash incentive plan and performance thresholds to its PSUs as well. According to the company proxy statement, “The overall impact of these recent changes led to a reduction in total compensation for CEO Downes from $25,032,334 in 2015 to $16,336,223 in 2016, a reduction of $8,696,111 or 34.7%.”

Other companies

Pay was also down significantly at American Express, AON, CVS, General Electric, General Motors, L Brands, Mylan and Tesero. At many of these companies and as well as at some mentioned above declines were driven in part by company performance. At L Brands TDC was also down by 47% the company, “Paid short-term incentive compensation below target for [executives] reflecting performance that did not meet our challenging goals.”

In past years poor performance was not necessarily a predictor of decline in pay as compensation committee often relied on discretion. To see pay decrease when metrics are not met shouldn’t be noteworthy, but in the context of CEO pay it may be.


Annual Meeting: July 26, 2017

McKesson CEO John Hammergren has been as “consistently one of America’s highest paid executives” as noted an article in Fortune and has appeared repeatedly on our overpaid CEOs list. Equilar calculates that he’s received over $368 million in realizable pay since 2012. Hammergren’s $20 million dollar 2017 pay is in the spotlight, under an effort by Teamsters pension funds to encourage votes against pay and in favor of a governance shareholder proposal and that also focuses on the role the medical distribution company has played in the opioid crisis.

“Recent pay decisions send completely the wrong message to shareholders, regulators and lawmakers and the public about executive accountability,” wrote the Teamsters in a letter to fellow shareholders.

One issue the Teamsters highlighted stood out to me as I am currently looking at changes made by companies in response to low votes on pay (stay tuned).  McKesson was such a company. By 2013 shareholders had had enough of the repeated high pay packages: 80% of shares were voted against. The company engaged with shareholders and made a number of changes as a response, many of which were announced in the 2014 proxy.

“A centerpiece of reforms enacted,” note the Teamsters, “was the introduction of an award based on total shareholder return.” The award based on relative to Health Care Index 2015 “as sole performance metric in new TSRU (Total Shareholder Return Units) program.” This is the sort of change shareholders applaud, and indeed support for advisory votes at McKesson increased. In 2016, 95% of shareholders votes in favor of the company’s pay package.

However, as the Teamsters have pointed out, this year the company made a subtle reversal on that commitment. Going forward, rather than just relying on TSR compared to peers, the so-called TSR units now include “three-year Cumulative Adjusted EPS” as a factor. Why? Well, while the company has its own explanation, it seems more than a coincidence that the new feature was added after the first set of TRSUs failed to pay out.

The first performance cycle covered under the changes was FY 2015 to FY 2017. As the company notes, “no payouts were provided due to stock price.” This is unusual at McKesson. According to the Teamster review, “This year was the first time in over a decade that any award, short- or long-term has not paid out at least at target (indeed, it is only the second time an award did not vest above target.”

In order to achieve threshold level of payout the company only had to perform at the 35th percentile relative to these peers, which in itself is a significantly low threshold. However, as the company reports, “Our TSR was at the 7th percentile relative to the S&P 500 Health Care Index over the three-year period ending March 31, 2017.”

This underperformance compared to peers did not seem to be an impediment to another angle that Teamsters zeroed in on, the boards again this year increased Hammergren’s annual cash bonus pay by using an “individual performance modifier.” This increased his bonus by $1.1 million (out of a total bonus of $6,000,000). The Teamsters note, “This customary lift to his annual bonus has continued even as earnings and share performance have disappointed over the past two years; but perhaps more significantly, even as the company has become embroiled in the prescription opioid controversy.”

McKesson is among the largest drug distributors in the country, and the roll of the firm and focus on these firms role in in the opioid crisis has shown a stark light in several investigative reports. As detailed in several reports pain pills were shipped disproportionately to West Virginia as the opioid crisis grew. In the Charleston-Gazette Pulitzer-Prize winning series Don Perdue, a former delegate of West Virginia is quoted as saying, “Distributors have fed their greed on human frailties and to criminal effect.”

In January of 2017 McKesson settled with the Department of Justice for $150 million claims that it had failed in its duty to report suspicious orders of opioids to the Drug Enforcement Agency. The company continues to face multiple lawsuits related to these and similar claims.

An in-depth story on McKesson in Fortune noted that, “It certainly wasn’t all McKesson’s fault. But you can’t have a drug epidemic without a distributor.”

As clear from recent news and legislative efforts, the United States has a mammoth and treacherously complicated health care economy. Part of the problem with the system is that profit is extracted at every step. Pension funds like the Teamsters — who care for the well-being of their members as well as the well-being of the stock price of investments – have many reasons to vote against the excessive pay at McKesson.

Book Review: The CEO Pay Machine

When you laugh out loud as you read a book on a train, people may want to know what you are reading. They aren’t expecting you to say, “Oh, a great new book on executive compensation.”

I wasn’t expecting to be chuckling myself, or to be so entertained by former CEO and board member Steve Clifford’s, “The CEO Pay Machine: How it Trashes America and How to Stop It.” But I was, and I begin the review this way because wit and wisdom are closely linked qualities.

The wit makes for pleasant reading, but the wisdom of the content is key, and clearly both spring from a sharp mind, filled with curiosity and reluctant to accept “that’s the way it is done” as an answer. Clifford was CEO for 14 year of communications company King Broadcasting, but it is the time he has spent on compensation committees that edifies the most.  Much writing on pay focuses on the amount paid; this book focuses on the whys and hows. It was inspired by the questions Clifford asked as a compensation committee member, and the answers he received.

After introducing his story, and walking through an imaginary fairy tale of setting pay, he devotes two chapters to explaining why this book merits a read by the broader citizenry.  One of these framing chapters is titled, “how the pay machine harms companies and shareholders” and the other is “how the CEO pay machine curtails economic growth and weakens democracy.” Both are quite compelling and crucial.

In subsequent description of the pay machine, Clifford takes apart all the components with a fresh eye. He is skeptical, for example, of the mantra of pay for performance. He notes that bonuses that don’t change behavior are a waste of money, and that many that do change behavior may change it for the worse. “All pay-for-performance systems cause more harm than good,” he writes. “They generate perverse incentives, undeserved and often absurdly high bonuses, and damage the companies that use them.” He offers concrete examples of ways CEOs can influence the setting of goals and targets as well as their achievements. “All of us, CEO’s included, would like to receive a bonus for fogging a mirror. Heads I win, tails I win. CEOs can often negotiate this happy result. “

He is similarly suspicious of peer groups and of “best practices.” As he notes, the evolution of pay includes many suggested adoptions of innovative governance-friendly ideas. But he points out that in order for a practice to become broadly adopted, “The practice must work to increase CEO pay. As a class, CEOs were able to veto any practice that diminished their compensation, so by this Darwinian selection, the Pay Machine evolved to relentlessly push the numbers into the stratosphere.”

He also speaks with great insight about the role of directors. “It’s impractical, if not impossible,” he notes, “for board members committed to being supportive players on the team to transform themselves into hard-nosed negotiators.”

A fascinating section of the book is an in-depth dive at pay of four highest paid executives at the time he was working on the book: Charif Souki of Cheniere Energy; David Zaslav of Discovery Communications; John Hammergren of McKesson (in the news again this week) and Stephen Hemsley of Unitedhealth Group.

Clifford takes apart the suppositions underlying much of compensation today, which he describes as delusions. The “importance delusion” overestimates the power of a particular individual on a company. Clifford believes that “CEO skills are largely company and industry specific.” Thus he disputes the pay-defender point that CEO compensation is analogous to that of super-star athletes. “A CEO changing companies,” writes Clifford, “is almost like an athlete who switches sports.”

Likewise Clifford questions whether bonuses truly motivate executives to do their very best work. As he does throughout the book, Clifford sites academic studies. In this case, “A meta-analysis of 128 studies of human behavior demonstrated that large monetary incentives tend to decrease motivation and performance.”

But as also seen throughout the book, it is his analogies that are the most powerful. He identifies “the performance delusion” as that corporate boards can effectively measure and reward CEO performance. Here he notes, “I could observe an evening of roulette and conclude that the best gamblers were rewarded for their performance. How do I know they were the best gamblers? Easy. They won the most money.”  This is essentially what some compensation consultants do in defending a link between pay and performance.

The “alignment delusion” is that “stock options and measurable bonus goals align the interests of the CEOs and shareholders. Clifford notes as many others have noted before him, “A shareholder pays for his stock and bears downside risk.”

The book concludes with suggestions for reforming the system. Clifford proposes higher salaries, elimination of cash bonuses, and half or more of compensation over long-term vesting. The awards he envision would not vest in their entirety until the CEO leaves or retires, and even then only if the shareholders have benefitted over the time the CEO was in office. In addition, a luxury tax would be included on every dollar over $6 million.

I think these are some fine ideas though I am skeptical that they will ever be enacted. Still, as Clifford writes, “Long accepted theories and practices can’t be replaced by outrage. They can be replaced only by better theories and practices.” A certain level of outrage, however, is a necessary if not sufficient to move this topic forward. Clifford has done a great favor by writing the book that may inspire a nuanced and sophisticated outrage among shareholders and citizens across the country. Everyone should read it.