Paychecks and Balances: When CEO Compensation Becomes Excessive
Hard Work and Compensation
As investors who apply an extra degree of diligence to our capital markets holdings– whether compelled by faith or otherwise in the interests of good corporate governance – ICCR is working to redress excessive CEO compensation. Part of the promise of the American Dream is the belief that hard work in the workplace will be justly compensated. Yet even when CEOs perform poorly, they still are compensated handsomely- $10.4 million in salary and bonuses on average among large company CEOs, while minimum wage workers earn just $6.55 an hour, often not enough to sustain their families between pay periods.
Through the mechanism of the shareholder resolution, ICCR has begun asking companies to give shareholders a say on CEO pay, in the form of an advisory vote to ratify the Board Compensation Report.
Avoiding Pay for Failure
As long-term investors, we want mechanisms that better link pay and performance while avoiding pay for failure, and Say on Pay does this. A Columbia and Harvard business school study on advisory votes in the UK found that Say on Pay produced fewer rewards for failure*, while a 2008 study found that future shareholder votes on executive compensation, mandated by Say on Pay legislation, will create value for firms with overpaid CEOs and firms more likely to respond to shareholder votes.**
ICCR believes these non-binding, advisory Say on Pay shareholder resolutions are a fair and reasonable reform to address the concerns surrounding executive pay. Giving shareholders a say would institutionalize a formal, annual method of communication for investors to give boards feedback on Compensation Reports.
Did You Know?
A 2005 Towers Perrin study of top executive pay in 26 major countries found that American executives make an average of twice as much as their French, German and British counterparts***.
90 percent of institutional investors and 61 percent of corporate directors think the current executive compensation system has overpaid executives.****
In 2009, ICCR member AFSCME has helped co-ordinate the filing of more than 100 Say on Pay proposals. Majority votes have been recorded at 20 companies.
Notes:
*Balachandran, Sudhakar, Fabrizio Ferri and David Maber, “Solving the Executive Compensation Problem through Shareholder Votes? Evidence from the U.K.” 10/7/07/
**Cai, Jie and Walkling, Ralph A.,Shareholders' Say on Pay: Does it Create Value?(December 08, 2008). Drexel College of Business Research Paper No. 2008-06. (available on www.ssrn.com).
***“Worldwide Total Remuneration Report 2005 – 2006,” Towers Perrin.
****“Corporate Directors Give Executive Pay Model Mixed Reviews, Watson Wyatt Survey Finds,” Watson Wyatt, 6/20/06. 50 directors who serve on corporate boards were surveyed.
