Elegy to the Absurd: How Executive Compensation Got Ridiculous
Albert Camus once wrote that “the absurd is born of this confrontation between the human need and the unreasonable silence of the world.” The silence of the world has been broken on exorbitant pay packages for CEOs, and the truth is indeed absurd. Thanks to SEC filing requirements, data is trickling in for the first time about how much more CEOs make than the average worker, and the results, while not unexpected, are disturbing.
A Wall Street Journal report released last week revealed that Marathon Petroleum’s CEO made 935 times more than its median worker salary. Honeywell’s CEO made 333 times more than its median worker (even while excluding non-U.S. workers). And Del Monte produces its own banana republic with its CEO earning more than 1,465 times the median worker. That’s not a typo. Are we really supposed to believe that Del Monte’s CEO is 1,465 times more valuable than its average worker? Great thinkers throughout the ages have suggested ratios more along the lines of 20:1. Where did we go wrong?
We just spent a few days at the Council of Institutional Investors conference, where we spoke with many investors who are also concerned about the issue. In The 100 Most Overpaid CEOs: Are Fund Managers Asleep at the Wheel?, As You Sow and HIP Investor put together looked fund managers who blindly approved ridiculous pay packages, even against the advice of investment experts and shareholders’ bottom lines. We also found, however, that many pension funds are exercising more diligence in their analysis every year and voting against ever more packages.
Are we really supposed to believe that Del Monte’s CEO is 1,465 times more valuable than its average worker?
We found that largest fund managers were most reluctant to vote against pay packages even as greater awareness of income inequality has led them to speak out more on the issue. Blackrock and Vanguard, two of the U.S.’s big fund managers, have started to inform companies that investors are losing patience with shortsighted decision-making, and that they persist at their financial peril. Yet, when it came time to vote, they rejected only 3% of pay packages.
The reasons for this phenomenon are hard to pinpoint. BlackRock and Vanguard defended their record by stating that they prefer a dialogue-based approach to corporate governance, but this rhetoric doesn’t match outcome. A New York Times reporter stated in a headline that BlackRock wielded its “big stick like a wet noodle on CEO pay.” In fact, two of the largest proxy advisers, Institutional Shareholder Services and Glass Lewis, advised fund managers to vote against 10% and 14% of pay packages at S&P 500 companies, respectively. Yet, even with these extremely modest recommendations, many mutual funds rejected the advice even when they would typically vote in lockstep with advisers.
We found repeatedly over the past four years of producing The 100 Most Overpaid CEOs that extreme pay does not correspond with extreme performance. The companies with the 10 most overpaid CEOs, from our first report, for instance, underperformed the S&P 500 by -15.6% - in a raging bull market. The excuses are becoming less and less plausible, as are the actual pay packages.
I’m heartened, however. The data has never been starker, and investors and fund managers do have a limit to their patience. In the wake of a devastating moral scandal around the price fixing of its Epipen product, the vast majority of Mylan’s shareholders rebelled against an absurd 97 million dollar pay package. Mylan’s absurdity was prominently visible. My hope is that more data and more awareness will bring the absurdity out of the shadows. Let us not mirror the America of 100 years ago. With the truth out in the open in a way that wasn’t possible a century ago, we can fight for reason.