Eye watering pay packages for CEOs, and the shareholders who approve and disapprove of them

Despite all the talk of equality during the Covid crisis, the level of investor opposition to hefty CEO pay packages remains minimal. 

“Very rarely do shareholders vote against pay because of a simple quantum, except where the amount of pay is so outrageous it would make even Donald Trump blush,” says Jamie Bonham, Director of Corporate Engagement at Canadian investment firm NEI Investments.

Backing this statement up, the latest report from US advocacy group As You Sow shows the median level of opposition to CEO pay at S&P 500 companies was 6.2% over the proxy year covered, to 30 June 2020.

However, in another set of calculations, the 100 Most Overpaid CEOs report excludes shares controlled by management and other insiders, counting only votes controlled by institutional fund managers. In that case, the study finds the number of S&P 500 firms where the CEO’s pay package failed to secure at least half the vote more than doubled – from six to 15.

“The idea is to really get a sense of institutional opposition,” says report author Rosanna Landis Weaver. “Particularly where it is masked and minimised by dual class shares and inside ownership.”

The report points to the “most overpaid” CEO as a classic example of this. Publicly-owned shares of Alphabet voted against Sundar Pichai’s pay package of $280m to the tune of almost 70%. But when the supervoting shares owned by Alphabet’s two founders, Larry Page and Sergei Brin, were included, 75% of shares supported the plans. 

David Zaslav, CEO at media giant Discovery and another of the worst ranked in the report, saw shareholder opposition against his pay rise to 86% when insider votes were excluded. 

The maths made little difference, however, to opposition against Larry Merlo, CEO at CVS Health, where – even with insider vote support – more than 75% of shares were cast against his pay package.

And it appears that this kind of opposition by fund managers is increasing. According to the report, financial managers controlling more than $2trn increased their level of opposition to CEO pay by more than 10%. This trend is attributed to a number of factors, with one of the most common being a change in voting guidelines. The report gives the example of the New York State Teachers Retirement System, which switched from voting against all CEO pay packages that received an ‘F’ (the lowest grade) under Glass Lewis’s pay grading system, to voting against packages that received a ‘D’ or below. This led the fund to vote against almost a third of pay packages in the S&P 500 last year, compared to just over 10% in 2019.

‘Rarely do shareholders vote against pay because of a simple quantum, except where the amount of pay is so outrageous it would make even Donald Trump blush’ – Jamie Bonham, NEI Investments

The 100 “overpaid” CEOs are identified using a statistical regression model to compute what the pay of the CEO would be if it was related to cumulative total shareholder return over the previous five years. Those rankings are then adjusted by Say on Pay voting results. These two elements are weighted 40% each and the final 20% weight is based on the CEO-to-worker pay ratio.

In general, the report found that non-US fund managers vote against US pay packages more often, with some – BNP Paribas Asset Management (BNPP AM), UBS Asset Management and Allianz Global Investors, for example – voting against 90% of them. US fund managers, especially the largest, BlackRock and Vanguard, support almost every pay package, with against votes at only 2% and 4% of companies in the S&P 500, respectively. 

Pension funds, in general, vote against pay packages more often than asset managers. Exceptions are Norges Bank Investment Management, which runs Norway’s government pension fund and voted against just 7% of pay packages in the S&P 500, and a number of Canadian pension funds. On the other hand, three Dutch pension investors – MN, PGGM and PKA – are among the most likely to oppose CEO pay, doing so in almost all cases for the S&P 500.

The report quotes Adam Kanzer, BNPP AM’s Head of Stewardship for the Americas, who agreed with Bonham: “Some investors believe there are issues with compensation structure, but not the quantum. Others hold the reverse. We have concerns regarding both.”

NEI has gone a step further than most and quantified these concerns, creating a limit for excessive pay based on the median of national household income, not company performance. A multiple of that is the bar above which it deems pay excessive. For the US, that multiple is 280-375 times, while for Canada it’s 150-200 times. 

“Even with this seemingly high bar,” says Bonham, “based on last year’s compensation levels we would be voting against 30 companies on the TSX Comp and 100 companies on the S&P 500”. 

The policy has so far led to votes against pay packages in Canada at Restaurant Brands International, manufacturer Magna International and insurer Manulife, among others. In the US, it voted against software company Adobe, professional services firm Accenture and Bank of America.

“We wrote to all these companies to explain why we had voted against them, but when you talk to them, they feel that investors have accepted the pay package as reasonable and justified based on performance,” explains Bonham, noting that all the firms against which NEI had voted received support of at least 80% of shares.

As You Sow’s Weaver also notes this, saying that “compensation consultants often point to votes on pay as an indication that shareholders are more or less okay with pay”. 

“We obviously disagree,” she continues. “The votes that get reported are often somewhat misleading.”

Bonham says the voting figures indicate “that people aren’t concerned about actual amounts, which shows that there is a fundamental flaw in the way we view executive pay”. 

“There’s no evidence that it is working – that highly paid CEOs are leading to huge outperformance. But we need more investors to agree that we are creating a systemic risk in society through this inequality. Why aren’t we all talking about this more?” 

He suggests that one reason for the reticence could be that “some of the CEOs of the largest asset management firms have stratospheric pay themselves”, and notes that most investors that vote against pay do so because they can’t find a link with performance. 

“But all this discussion of performance metrics is just designing different ways to get to the same figure. It’s a little stomach churning, sometimes, having to vote on these pay packages.”