Report shows 92% of CEO pay plans unchallenged

A report by US shareholder advocacy group As You Sow reveals that mutual funds Vanguard Group and BlackRock, which together manage $7.6 tn, voted with directors on executive pay plans 97% of the time last year. The data is based on a tally of 100 companies whose chief executives received $9.7m or more in annual pay. TIAA-CREF, which provides insurance and retirement products for teachers and has over $800 bn in assets, supported 96% of the plans. However, according to the report, pension funds in general increased their opposition to pay plans in 2015. Despite this, failing votes remain rare. According to Bloomberg, support for pay packages in the S&P 500 index averaged 92% in each company’s most recent vote.

Manfred F. R. Kets de Vriescalls, of INSEAD -- a graduate business school with campuses in Europe, Asia and the Middle East -- wrote recently that inflated CEO pay is “a sign of impending rot.”

Overpaying the CEO of a company can lead many people to make the false assumption that such compensation is "earned" and justified. It is not. Indeed, the average corporation in its annual proxy statement devotes about ten thousand words to justify those large payments to their CEOs, often rationalizing those large payments by calling them "performance" based and market rate (citing as peers only overpaid CEOs).

Shareholder votes on CEO pay packages provide a critical and underutilized tool for restraining the worst excesses.

This report seeks to identify which financial managers are exercising their fiduciary responsibility and voting against these excessive payments. And conversely, which ones are simply rubber stamping their approval to ever-increasing CEO pay in company after company.

Methodology

In prior years we employed a methodology using two rankings to identify the 100 most overpaid CEOs. For one ranking we used a regression based on total shareholder return (TSR) conducted by HIP Investor. For the other ranking we combined an aggregated score of 30 problematic pay practices ("red flags"). These two rankings were weighted equally to create a final ranking. Doing this we found a high correlation between the companies on our final list and those that received the highest level of opposition from shareholders voting on these pay packages at the annual meetings.

This year we focused the report on large asset owner voting and created a simpler methodology that still used two rankings. The first is the same HIP Investor regression we’ve used every year that highlights excess pay based on TSR. The second ranking used the lowest proxy votes for pay packages at S&P 500 companies as a stand-in for the more detailed red flag methodology. These two rankings were weighted 2:1 with the regression analysis being the majority. We also excluded those CEOs whose total disclosed compensation (TDC) was in the lowest third of all S&P 500 CEO pay packages. The full list of the 100 most overpaid CEOs using this methodology is found in Appendix A. The regression analysis of predicted and excess pay performed by HIP Investor is found in Appendix C and its methodology is more fully explained there.

There are three companies – Comcast, ExxonMobil, and Oracle – that have now been on the list every year. An additional five are also repeats from last year: Chesapeake Energy, Citrix, Discovery Communications, Regeneron Pharmaceuticals, and Wynn Resorts.