Compensation Reports
As You Sow publishes our annual report on overpaid CEOs and voting practices each winter so we can focus on specific voting patterns from the prior year. However. we are not the only organization concerned about executive pay. Here’s an introduction to a few other updates. All reach the same consensus: CEOs are overpaid.
AFL-CIO Executive Pay Watch
One resource that has been around the longest is the AFL-CIO Executive PayWatch website, which was initially launched in 1997, back when launching websites was a newsworthy event. Annual updates provide great visualizations of CEO pay, a useful database, and new analysis. One of the statistics I found most interesting this year: “The average U.S. production and nonsupervisory worker’s pay has increased by $8,360 in the past decade. The average CEO's pay increased $3.4 Million over that same time period.”
The 2020 theme for the release was, "1,000-to-1 Club Pay Ratio Companies That Furloughed Workers in 2020." Among these 20 companies, many were in the retail sector, including Game Stop, Foot Locker, and The Gap.
Economic Policy Institute
The Economic Policy Institute’s annual report is analytical, digging deeply into a variety of data points. Economist Larry Mishel has written the report for many years, and the title generally indicates, as it does this year, an increase in pay. This year’s report is titled CEO compensation surged 14% in 2019 to $21.3 million. This figures is used in this calculation is somewhat higher, and perhaps more accurate, than those that rely solely on summary compensation figures disclosed in proxy statements. In a key change this year, EPI calculated total compensation in two different ways, one that includes the effects of the bull market.
As I’ve noted in many blogs, the summary compensation figures reported in proxies have dramatically under-reported actual value in pay, when taking into account options that were granted at the bottom of the recession that were cashed into a record bull market. EPI this year gave two sets of figures. One was the traditional “total disclosed compensation” used in proxy statement summary compensation tables (SCT). This is used in many analyses (including ours), because it is the one that shareholders are instructed to consider when voting on executive compensation. The second calculation included realized compensation, that looks at the value of stock options when they are cashed, and stock award value on the date they vested. This figure may be in fact more accurate as far as showing unmerited windfalls. (Both calculations include the same figures for salary, bonus, pension, and other figures in the SCT.) Using the realized figure, EPI calculated the average CEO compensation of the top 350 firms, and found that, as this Washington Post headline states, “Average CEO earnings soared to $21.3 million last year and could rise again in 2020 despite the coronavirus recession.”
EPI also performed the same analysis it had in the past, using figures as they appear in the SCT. “By that measure, CEO compensation grew by 8.6 percent in 2019, to $14.5 million.” EPI found that top CEO compensation doubled over the economic recovery, from 2009 to 2019, growing 105.1%.
The report notes that, “The generally tight link between stock prices and CEO compensation indicates that CEO pay is not being established by a ‘market for talent,’ as pay surged with the overall rise in profits and stocks, and not with the better performance of a CEO’s particular firm relative to the performance of that firm’s competitors.”
The report includes detailed numerical tables with data that goes back as far as 1965, that show astonishing trends. In particular, the report found that, “Using the realized compensation measure, compensation of the top CEOs increased 1,167% from 1978 to 2019 (adjusting for inflation).” Over the same period typical workers’ compensation was only 13.7%.
EPI also notes that firm consolidation has given the CEOs examined in its report “a degree of market power that has grown in recent decades. It seems that CEOs and other executives may have been prime beneficiaries of these firms’ greater market power.” A return to greater anti-trust enforcement and regulation may contribute to lowering CEO pay, as well as providing economic efficiency and greater competition.
High Pay Centre
In the United Kingdom, the High Pay Centre is an independent think tank that monitors high pay. It puts out an annual report on executive compensation in some ways similar to EPIs. Because part of the goal for the Centre is “to set out a road map towards better business and economic success,” its report also includes a list of suggested reforms.
The report Annual FTSE 100 CEO Pay Review, looks at pay of the largest 100 companies listed on the London Stock Exchange. For the financial year 2019, the report found that FTSE 100 CEOs “took home a median pay package worth £3.61m, which is 119 times greater than the median earnings of a UK full-time worker (£30,353). This is broadly the same as the median FTSE 100 CEO salary for the financial year ending 2018 (£3.63m) and only represents a 0.5% decrease.”
The report also includes information on pay ratios, though because UK regulation has only recently begun to require individual company data to be included, the Centre uses an approximate figure[RLW1] . “Both median and mean pay packages have dropped slightly since last year’s report. Median pay is now at its lowest level since 2011 at £3.61 million.”
Other key findings of the report include:
· Fifty firms paid less to their CEOs in 2019 than in 2018, with the number of companies paying their CEOs more than £10 million dropping from eight to six.
· Seven FTSE 100 companies experienced ‘significant’ shareholder dissent over their 2019 pay award, with over 20% of the shareholder vote opposing the resolution to approve their remuneration report at the companies’ annual meetings.
· As with other reports this year, COVID and income inequality were part of the focus of the report, which noted among other questions investors are asking, “Should all workers, irrespective of grade, receive the same paid leave if they fall ill? To what extent could pay currently accruing to top earners be used to support pay rises or protect jobs for lower earners?”
One fundamental reform recommended by the High Pay Centre is broadening the role of the remuneration committee (RemCo similar to what is known in the U.S. as the compensation committee), or replace it with a formal people and culture committee. The Centre contends that such changes would promote consideration of “organizational culture, fairness and wider workforce reward policies rather than maintaining their narrow focus on pay for a small number of senior managers.”
The report includes several recommendations, including the following, all of which are described in more detail in the report:
· Companies should establish a people and culture committee in place of their remuneration committee (RemCo), or at least broaden the remit of their RemCo to consider organizational culture, diversity, and environmental sustainability.
· RemCos should ensure a greater proportion of CEO pay is linked to non-financial measures of performance.
· Firms should link CEO reward packages to fewer, but more meaningful performance measures, and attempt to reduce complexity.
· RemCos should ensure that the benefits that the CEO and other senior executives enjoy, are fair in relationship to what the rest of the workforce receive, such as health benefits and pension contributions.
Public Citizen
On the 10th anniversary of the passage of the Dodd-Frank Wall Street Reform and Protection Act, this Washington, D.C. progressive think tank Public Citizen released “White Collar Crime Pays: A Public Citizen Survey and Blueprint for Reform.” The report’s first finding is: “Because of badly constructed pay incentives, thousands of bankers engaged in widespread fraud, inflating a housing bubble whose rupture cost millions their jobs, savings and homes.” The report chronicles several specific instances of corporate failures that may have been roots, in part, in perverse incentives.
The Public Citizen report advances a variety of ideas for reform, many using features of the Dodd-Frank act. For example, the annual advisory vote on pay – which is the data As You Sow focuses on, should be made a binding vote. In addition, “Where shareholders oppose the package, the pay should revert to 20 times the median pay at the company, and director compensation should be cut in half, a concept promoted by economist Dean Baker. We also propose following the model pioneered in Australia, where if 25 percent of shareholders oppose the pay proposal two years in a row, the board must stand for re-election.”
Congress could also apply pay-ratio consequences to government procurement, as lawmakers in Rhode Island have proposed. Federal lawmakers, urges Public Citizen, “should ban contracts to corporations with extreme gaps or give preferential treatment to firms with narrow gaps.”
Sam Pizzigati, writing in Couterpunch, describes these and others as “politically plausible corporate pay reforms.” In his essay, “For Egalitarians, a Sudden Sense of Possibility”, Pizzigati acknowledges that, “Outrageously high rewards are continuing to give top execs an incentive to behave outrageously — to their workers, customers, and communities — on everything from job safety to the cost of prescription drugs.” Yet he finds reasons for optimism. For example, “Before Dodd-Frank’s disclosure mandate, we couldn’t drill down from these national executive-worker pay ratio figures to the individual enterprise level.”