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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.


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 got rid of quickly after shareholders gained the right to pay. I counted 26 companies eliminated gross-ups (company payment for executive tax after change in control) and/or added 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 adopted or improved their clawback policies.

Then there were the companies

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: 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 general. 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 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 engage 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 including 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.


Annual Meeting June 22

The company infamous for its inflated EpiPen has been in the news a lot lately. The astonishing pay package of Chairman Robert Coury — $97,600,615 reported for 2016 — has received widespread coverage from Bloomberg, Business Insider, CNN,  USAToday and dozens of other publications.

Given the information included in the above articles, I thought I’d focus on the original source documents filed at the SEC and the back and forth between the company and some of its reasonably angry shareholders. Since Mylan filed its proxy on May 23, there have been eight additional filings. Here is a breakdown of those filings with links and highlights:

On May 30:  a group of institutional shareholders filed a non-exempt solicitation urging shareholders to vote against six directors as well as Coury’s pay package that the funds estimate as being worth $160 million.  “Despite persistent investor concerns with Mylan’s pay practices, Mr. Coury – who stepped down as Mylan’s CEO as of January 1, 2012 – received a third new and excessive compensation agreement in mid-2016, when the Board changed his title from ‘executive’ to ‘non-executive’ Chairman for at least the next five years.”

These investors — 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 — hold 4.3 million shares valued at $170 million. (In later correspondence Mylan directors refer to them as, “this small opposition group.”) The letter to shareholders notes, “We believe the time has come to hold Mylan’s board accountable for its costly record of compensation, risk and compliance failures.”

Among other things, the investors decry Coury’s compensation given that he was executive chair.  The New York City Pension Funds have been attempting reform for over five year. As noted:  “this Board has given Mr. Coury THREE post-CEO compensation agreements to keep him around – and this despite strong investor support (35% to 42% of votes cast) for the New York City Pension Funds’ shareowner proposal requesting an independent chair at Mylan’s 2012, 2013 and 2014 annual meetings.”

In addition to critiquing Coury’s package the funds raised the specter that Coury’s opposition to a potential acquisition by Teva Pharmaceutical Industries Ltd. May have been motivated by self-interest. “By year-end 2016, when Mylan’s Chairman, CEO and President each had again earned extravagant payouts, Mylan’s share price had dropped further to $38.15.  All of the mudslinging back-and-forth between Mylan and Teva10 only served to reinforce our concern that Chairman Coury would rather keep his pay and power at Mylan’s helm than likely lose those benefits to Teva cost- and position-cutting”

On May 31 the New Your City comptroller’s office filed a press release that included quotes from investors explaining why they joined the campaign:

“This entrenched and unaccountable board is long overdue for an overhaul,” said NY State Comptroller Thomas P. DiNapoli. “Mylan’s bloated pay packages add insult to the injury investors have suffered as a result of its poor governance.”

”Problematic pay and poor governance practices have plagued Mylan for a number of years.  The EpiPen price spike was particularly appalling because California state law requires schools to have EpiPens or like products on site. As the fiduciary of the Teachers’ Retirement Fund, it is our responsibility to hold the Mylan Board accountable for its actions and potential resultant financial and reputational risk damage. Voting against the say-on-pay proposal sends a strong message to the Mylan Board that it has failed in its responsibility and duty to shareholders by continuing the misalignment of executives’ pay with the value received by shareholders,” said CalSTRS Director of Corporate Governance Anne Sheehan.

On June 2, the company filed a colorful proxy supplement (with tiny fonts in its discussion of non-GAAP Financial Measures). The presentation goes through, at some level of detail, its target setting process, pay for performance design, and the fact that, “the board continues to refine our compensation approach.”

As one example of such refinements the company noted that it had “removed automatic accelerated vesting of stock option, RSU, and PRSU awards for eligible executives upon an individual satisfying retirement-eligibility criteria (55 years of age with 10+ years of service).”  Frankly, that it had such a feature, particularly on performance shares, is extraordinary. In addition, it appears that the change may be true only on going forward basis.  The company notes that, “Ms. Bresch and Mr. Malik have voluntarily waived their right to this provision for previously granted RSUs and PRSU.” I did not see information on how many executives may have been grandfathered in.

On June 6, in an unusual move, the company publicly filed a copy of a letter it sent to Institutional Shareholder Services (ISS) challenging the proxy advisory firm’s decision to not give the company pre-review rights on its report and recommendations.  In it board members explained that, “When faced with the prospect of Mr. Coury’s retirement last year, the Board, recognizing the immense value that Mr. Coury has brought to the company, its shareholders and other stakeholders, believed it was critical to retain his leadership and experience in this new role – a role that is uniquely suited to Mr. Coury’s talents and past experiences.”

On June 7, the company filed ISS’s response which explained its policy. .

On June 12 the company filed another letter it wrote to shareholders. In it they attempted to justify Coury’s compensation by noting that, “almost all of it was granted and earned over his 15-year tenure as CEO and then Executive Chairman, or directly relates to his retirement as an executive in 2016 and transition to non-executive Chairman.”  They add that, “his new compensation structure is even further aligned with the company’s stock performance while providing shareholders with the benefit of his continued leadership and guidance in setting Mylan’s strategic direction over the next five years. Mr. Coury’s restricted stock units will incentivize him to perform over the next five years and are unrelated to retirement payments otherwise due to him as a result of the termination of his employment.”

Also on June 12: , The pension funds filed with the SEC a press release,  noting that proxy fund advisors ISS and Glass Lewis have each recommended against the pay proposal as well as against some directors. The filing quotes ISS as noting that, “Mylan and its shareholders have suffered significant destruction in shareholder value as a result of the EpiPen pricing and classification controversies which emerged as public issues in 2016…. The company has also suffered long-term reputational damage.” Glass Lewis wrote, “we find the compensation arrangements made with Mr. Coury pursuant to his transition to be egregious.”

Vertex Pharmaceuticals

Meeting date: June 8

In 2016, Vertex writes, “74% of the “Say-on-Pay” advisory votes cast by our shareholders [were cast in favor], which was a significant increase in support compared to 2015.” Of all I read in the proxy statement that sentence stood out to me the most, the way they framed a low level of support.

If one of my children came to me to say they got a 74% on a test, which was a “significant increase” in a grade, I would not be satisfied. I’d acknowledge improvements made but still hold them to a high standard. Shareholders have an opportunity to give a similar message to Vertex at the upcoming annual meeting. Yes, pay is down significantly from a few years ago, but it has fallen from obscenely high to merely bad. CEO pay at Vertex is still out of line with peers and still includes problematic practices.

Vertex continues a practice of what some call “aspirational peers.” It includes larger companies in its peer group for establishing pay comparison. It is the job of the directors to take on the supervisory role and tone, perhaps saying something along the lines of, “We’ll talk about whether you should be paid as much as those big, successful pharmaceutical companies when you are as big and successful as they are. Until then, stop worrying about what they are being paid and focus on your own work.”

However, directors at Vertex apparently lean toward indulgence. The board set “company goals and assigned relative weights that reflected our operational, strategic and financial objectives for the year” with a maximum score of 150 points. Many of these, such as “maintain high productivity in research” as somewhat subjective. When the total earned came to 111, the board awarded an additional 9 points “based on additional factors that were not anticipated in our goals.”

Also of note, a Boston Globe analysis of director pay, Vertex had among the highest paid directors in 2015. One recent article on CEO pay noted that director William D. Young received $1.7 million in compensation from Vertex in 2015. The vast portion of this, as the Globe pointed out, was in the form of stock options he received when joining the board. For the past year Young, who is a member of the compensation committee, received $668,096 in compensation.

It seems to me that if someone is being paid an outrageous sum for what is essentially a part-time job it follows that they might be inclined to support a level of generosity toward the executive the purportedly direct.

Blackrock Shareholder Proposal

May 25, 2017

Next week Blackrock shareholders will vote on an important proposal that has potential to make a real difference on CEO pay. It isn’t just an advisory vote on the company’s pay, but one that seeks to learn more about why Blackrock routinely supports outrageous pay packages at the companies in its portfolios. Specifically, the proposal requests that the Board of Directors issue a report to shareholders which evaluates options for BlackRock to bring its voting practices in line with its stated principle of linking executive compensation and performance. Such report should assess whether and how the proposed changes would advance the interests of its clients and shareholders.

The Steve Silberstein Trust first filed this proposal last year, and it received press attention from the New York Times which included the memorable headline, “Blackrock wields its big stick like a wet noodle on CEO pay.” Enough shareholders supported that proposal that the threshold for resubmission was crossed.  This year, ISS’s SRI policy service is recommending support for the proposal, noting that the “requested report would benefit shareholders.”

As You Sow has been monitoring votes on pay for several years. Nearly every one of the 118 mutual fund families and over pension funds opposed more pay packages in 2016 than they had in 2015. Yet the overall vote levels pay packages received did not change substantially. How is that possible? Primailary because three of the largest funds (Blackrock, Vanguard and TIAA are also the least likely to oppose proposals).

In the most recent version of our annual report on the 100 Most Overpaid CEOs in the S&P 500, Blackrock voted against pay packages at only 7% of the companies. Contrast that with the pension funds:

  • Florida State Board of Administration voted against 82%
  • State of Wisconsin Investment Board voted against 73%
  • Colorado Public Employees Retirement voted against 46%

In fact none of the pension funds voted against as few of the packages as Blackrock did. The pension funds who voted against the fewest packages still opposed more than three times the number that Blackrock did, and more than one fund voted against more than 10 times as many packages as Blackrock did.

Likewise, almost all large mutual funds opposed more pay packages than Blackrock did. Dimensional voted against 53.2%, Columbia against 45% and so on.

Why is its voting record so pallid? Blackrock is hardly impartial on a compensation system in which it is so deeply implicated itself.  The company itself has a CEO we view to be overpaid.  In fact, at least one proxy advisory firm has recommended against pay at the company this year.

Blackrock is a behemoth with a mission statement is, “We are one Blackrock.” Their website says, “Constant communication is critical to our success.” Yet as we have followed the company we often have the feeling that the right hand doesn’t know what the left hand is doing however, or that the spokespeople know how the proxies are being voted. For example, last year Amra Balic , the company’s head of investment stewardship in Europe, reportedly sent a strongly worded letter to U.K. companies. In the letter, Balic said Blackrock “would only approve salary rises for top executives if firms increase workers’ wages by a similar amount.” This would be a game changer if enacted, but it counters voting at U.S. companies.

Here’s an example, unrelated to compensation, of an astonishing internal disconnect. This year shareholders vote not only on pay packages but on how often they will vote on pay packages, a vote sometimes called, “Say when on pay.”

Here’s how the Board at Blackrock recommends shareholders should vote on the company’s own proxy:

After careful consideration, the Board has determined that future advisory votes on executive compensation that occur every year is most appropriate for our Company, and the Board recommends that you vote for a one-year interval for future advisory votes on executive compensation.

The Board believes that an annual advisory vote on executive compensation will allow our shareholders to provide us with their input on our compensation philosophy, policies and practices as disclosed in the Proxy Statement on a timely basis. Additionally, an annual advisory vote on executive compensation is consistent with our policy of seeking input from, and engaging in discussions with, our shareholders on corporate governance matters and our executive compensation philosophy, policies and practices. We understand that our shareholders may have different views as to what is the best approach for the Company, and we look forward to hearing from our shareholders on this proposal.


Here’s what Blackrock says in its guidelines about how it vote at other companies

Advisory votes on the frequency of Say on Pay resolutions (“Say When on Pay”) BlackRock will generally opt for a triennial vote on Say on Pay. We believe that shareholders should undertake an annual review of executive compensation and express their concerns through their vote on the members of the compensation committee. As a result, it is generally not necessary to hold a Say on Pay vote on an annual basis, as the Say on Pay vote merely supplements the shareholder’s vote on compensation committee members. However, we may support annual Say on Pay votes in some situations, for example, where we conclude that a company has failed to align pay with performance.

So Blackrock as a shareholder believes that every three years is the right amount of review (something I disagree with), but as a company recommends its shareholders vote for annual votes.  The company is unable to be consistent even on a simple matter of one year vs. three year votes.  How then does it enact consistent analysis on compensation, an issue far more nuanced and complicated. Shareholders are given very little information.

The amount of support proposal at Blackrock can gain is limited by the company’s structure. PNC which controls 21.2% of shares has a signed agreement that guarantees it will not vote in favor of shareholder proposals. Specifically, “PNC has agreed to vote all of its voting shares in accordance with the recommendation of the Board of Directors on all matters.” Note that I recently reviewed pay at companies insulated by shareholder

However, if more shareholders speak out and support the proposal, perhaps Blackrock will manage to put some starch into that wet noodle.