Shareholders slammed CEO pay last year. Will 2022 be different?

CEOs at S&P 500 companies are paid more than 350 times the median salary for workers, on average, something institutional investors are watching

CEO compensation at the country’s biggest companies has grown to levels that would have been unfathomable decades ago — and increasingly shareholders are voting in opposition to it.

Last year, majorities of institutional investors voted no on pay packages 29 times, up from 15 such instances in 2020, according to a recent report on the “100 most overpaid CEOs” from As You Sow. When total votes were counted, including those of company insiders and management, 16 companies saw their “say-on-pay” votes fail last year, up from 10 in 2020 and seven in 2019.

The top-paid employees at public companies have seen their compensation grow far beyond old multiples to the pay for median workers at their firms. For example, the ratio of CEO-to-typical-worker compensation was 21-to-1 in 1965, and grew to 61-to-1 in 1989 and 307-to-1 in 2019. By 2020 that ratio was 351-to-1, according to data from the Economic Policy Institute cited by As You Sow.

CEOs at the biggest 350 public companies in the U.S. received an average of more than $24 million in compensation last year.

However, that’s not necessarily why institutions have been voting pay packages down. Instead, major shareholders appear to have had problems with “questionable practices and metrics in setting CEO pay,” the report noted.

“[C]ompanies that changed CEO pay performance metrics this year using Covid-19 as the excuse received high levels of negative votes from shareholders,” the authors wrote. “Because CEO pay is highly peer group linked, an increase that may appear justified at one company then inflates pay at many other companies in the company’s peer group. This ratchets up the pay of all CEOs, and shareholders do not seem to object.”

So-called say-on-pay advisory votes are required by law for most public companies every three years and apply to the top-paid executives. Although the results are nonbinding, companies must disclose going forward how they used the results of votes to determine compensation.

Small promises, big pay

Last year, some CEOs pledged to reduce their salaries because of the pandemic, but doing so had little effect on their overall compensation, As You Sow noted. Because base pay is often small compared with equity awards, overall compensation still reached record highs last year, despite offers to forgo portions of salaries.

Further, compensation committees in some cases moved to protect their CEOs’ pay from pre-pandemic metrics, leading to bigger benefits for top executives even as company performance lagged.

The report cited examples at Norwegian Cruise Line, Sealed Air Corp. and TransDigm Group.

“Norwegian Cruise Line was severely impacted by the pandemic, reporting a $4bn loss and an 80% decrease in revenue. Yet, the board awarded the CEO, Frank Del Rio, pay of $36m … raising his 2020 compensation to twice that of 2019. Nine of Norwegian Cruise Line’s largest investors voted against this change, with only one, Northern Trust Investments, approving the proposal. Overall, 96% of shares held by institutional investors voted against Mr. Del Rio’s increased pay,” according to the report.

The list

The most overpaid CEO for the year ended June 30, 2021, was Paycom Software leader Chad Richison, whose compensation was more than $211m, or nearly 3,000 times the median worker pay at the company, according to As You Sow. Last year, 70% of shareholders voted against the pay package, including 93% of institutional investors, the report noted.

Second was Norwegian’s Del Rio, followed by General Electric CEO H. Lawrence Culp Jr., whose pay was more than $73m. Fifty-eight percent of shareholders voted against the pay arrangement, including 62% of institutions, according to the report.

Fourth and fifth on the list were T-Mobile’s G. Michael Sievert and Nike’s John J. Donahoe II, at $55m and $54m, respectively. The majority of total shareholders approved their pay, but most institutional investors did not, according to As You Sow.

More to come?

Compensation could be even higher than last year’s levels. At least three S&P 500 companies have shown pay increases of more than 100% over a year for their CEOs, said Rosanna Weaver, As You Sow’s wage justice and executive pay program manager and one of the report’s authors.

“What I’m worried about this year are very high pay packages,” Weaver said.

Whether because metrics were set artificially low amid pandemic expectations or because they were simply too low to begin with, some CEOs have had little trouble meeting requirements for big payouts, she said.

An early indication of investor sentiment this year could be seen in the recent proxy vote for homebuilder D.R. Horton, Weaver noted.

In January, nearly three-quarters of shareholders voted against the company’s executive pay, according to Securities and Exchange Commission filings. Board chair Donald Horton had total compensation of more than $50.5m, due almost entirely to stock awards and incentive pay, the company’s proxy statement shows. Meanwhile, CEO David Auld took in more than $30.5m.

“The pay went up too much. There wasn’t a meaningful cap. The targets weren’t rigorous enough,” Weaver said. “That case saw very high opposition. I don’t know if we’re going to continue to track that” in other upcoming votes.

Although shareholders seem to be more concerned with compensation metrics than levels of pay, the latter is also important to consider from an ESG standpoint, Weaver said.

The ratio of CEO compensation to worker pay, for example, “tells you about how the company is governed and how the board behaves,” she said.

That’s also worth considering from a social viewpoint, Weaver said. “There are many indicators … of how dangerous income inequality is.”