CEOs are grossly overpaid — and the earnings of the most overpaid CEOs keeps skyrocketing. CEO pay grew a staggering 997 percent over the past 36 years, “greatly outpacing the growth in the cost of living, the productivity of the economy and the stock market,” as a recent report by As You Sow reveals. And that disproves the claim that CEO pay is reflective of a company’s performance.
Titled the 100 Most Overpaid CEOs, the report is the second from As You Sow in as many years to highlight the 100 highest earning CEOs of S&P 500 companies. Has anything changed in one year? Last year, pay for S&P 500 CEOs increased, with some estimates putting that increase at up to 15.6 percent. Meanwhile, the value of those companies’ shares “actually declined slightly.” Eleven of the top 25 most overpaid CEOs made the list for the second year in a row, and regression analysis reveals that there were 17 CEOs with compensation of at least $20 million more in 2014 than they would have received if their pay was aligned with performance.
So, why is CEO pay continuing to increase? “The companies are getting signals from large institutional shareholders that are approving this trend,” said Andrew Behar, CEO of As You Sow, in recent webinar on the report.
“The assertion in CEO pay is that you get paid for performance,” said R. Paul Herman, CEO and founder of HIP Investor. “The highest correlation of performance to pay was only 2 percent.”
“Our report shows these CEOs are paid vastly in excess of what would be appropriate for the value that they add,” said Rosanna Landis Weaver, report lead author and program manager of As You Sow’s Executive Compensation Initiative.
The problem with pension funds
“One of our big changes this year was an extended look at public pension funds,” Landis said. Last year, As You Sow reported on shareholder proxy votes by nine large North American public pension funds. But this year the group expanded its coverage to include 32 funds.
What researchers found is that one of the funds with the greatest change is the California Public Employees’ Retirement System (CalPERS), which increased its opposition to overpaid CEO pay packages from 30 percent last year to 47 percent this year. CalPERS has $300 billion in assets under management and is the second largest pension fund in the U.S. The fund with the highest level of opposition (76 percent) is the British Columbia Investment Management Corp. (bcIMC), which manages over $120 billion in pension funds.
The problem is that pension funds are not required to publicly disclose votes, unlike mutual funds. However, there are some pension funds that do disclose their shareholder proxy votes to beneficiaries and the public. The Canadian Pension Plan Investment Board states on its website, “One of the most effective mechanisms we have to engage with public companies is voting our proxies. As an engaged owner, we are transparent in our voting activities and implement the leading practice of posting our individual proxy vote decisions in advance of meetings.”
Compensation committees are the ones who vote on CEO pay compensation, and many members serve on more than one board that’s allegedly overpaying executives. As You Sow found that 21 directors serve on two or more of the boards it highlights for overpay. As the report states, “A director who has already approved an extraordinary pay package at one company may be seen as a good candidate to agree to a similar package elsewhere.”
Or as Nell Minow, journalist and noted corporate governance expert, said: “There’s no amount of disclosures that are going to tell you what the real connections are.” The connections between board and CEO can make it “difficult to say no to the CEO,” he added.
How excessive CEO pay can be curbed
So, what can be done to curb excessive CEO pay? As You Sow lists several recommendations, including:
- Shareholders need to make sure their assets are voted wisely.
- Mutual fund owners and pension contributors need to hold their fund managers accountable.
- Shareholders need to hold board directors accountable.
Curbing excessive pay is an extremely important task. “When CEO pay is excessive, it is destabilizing to the company,” Herman of HIP Investor said.
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