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.

This report continues to represent the broadest survey of institutional voting ever done on the topic.

Financial managers often rely on proxy advisors to evaluate CEO pay packages. The two largest advisors, Institutional Shareholder Services (ISS) and Glass Lewis, compete with several smaller advisors like Egan Jones, Segal Marco, and PIRC.

ISS recommended voting against 10% of the CEO pay packages at S&P 500 companies, and 38 of the 100 most overpaid CEOs.   

Glass Lewis recommended shareholders vote against 14% of CEO pay packages out of all the S&P 500 companies, and 42 of the 100 overpaid CEOs.

Egan-Jones Proxy Services recommended 30% of pay packages at S&P 500 and against 42 of the 100 most overpaid CEOs

Segal Marco Advisors, which provides proxy voting services to multi-employer and public pension funds, recommended shareholders vote against 43% of pay packages at S&P 500 companies 57 of the overpaid CEOs.  

PIRC, one of the largest proxy advisors in Europe recommended votes against at 58% of S&P 500 companies. They recommended voting against 67 of the companies with the lowest votes, and abstained on the remaining 32 in its portfolio.

ENGAGEMENT

A number of funds, BlackRock and Vanguard among them, have defended their lack of voting opposition to a philosophical preference for engagement, believing that the most effective way to shift corporate governance is through dialogue.

There is no way to verify whether these negotiations are having a meaningful effect on pay magnitude or specific pay practices and in fact the trends over time suggest they are not. Engagement without   voting in opposition is practically meaningless as the New York Times reporter Gretchen Morgenson reported in her April 15, 2016 piece “BlackRock Wields its Big Stick Like a Wet Noodle on CEO Pay.” The votes are the only real way mutual fund clients and pension fund participants can evaluate how seriously these financial managers take this issue.

VOTES OF MANAGERS OF MUTUAL FUNDS AND ETFS

However, as can be seen in Figure 3 below, some of the very largest funds have the worst record of voting against pay packages.

However, as can be seen in Figure 4, funds that automatically support compensation packages are now the exception. This year there were 25 funds that voted against more than half of the 100 overpaid CEOs. Several of these are social investment funds.

As can be noted from the table above, non-US fund families have the highest levels of voting against.  

Allianz Global Investors also has a strong record of voting against, as do many other funds who vote from a non-US perspective. In a Financial Times article, Eugenia Unanyants-Jackson, global head of environmental, social, and governance research at Allianz Global Investors said, “When we look at remuneration structures in UK or in some European markets, there is a much closer link between strategy and payouts, compared with US companies. We support variable remuneration, but we think it should only be paid if robust targets are made.”

Natixis, which also appears on this chart with a high level of opposition to these CEO pay packages is a privately-owned asset management holding company based in Paris, France.

As we will see, the same trend of higher opposition when U.S. CEO pay is evaluated by those outside the U.S. is evident with pension funds as well.

A few other investment affiliates continue to cast proxy votes, typically following ISS guidelines according to the spokesperson, and the disclosure for those funds (under the name Nuveen) lines up almost exactly with votes 9.6% of all S&P 500 CEO pay votes it cast, and 44% of those at Overpaid CEO companies.

VOTES BY PENSION FUNDS

As can be seen from Figure 5, pension funds typically have a higher level of opposition to overpaid CEOs. The opposition level to the overpaid CEOs was more than 50% at 15 of the funds. As with mutual funds, non-US pension funds had the highest levels of opposition. Of the Canadian funds, Alberta Investment Management Corporation (AIMco) and British Columbia Investment Management Corporation (bcIMC) both had opposition levels over 70% on the overpaid CEO packages.

PGGM, a leading Dutch pension administrator with $251.6 billion in assets, voted against 97.2% of all CEO pay votes at S&P 500 companies.

The Northern Ireland Local Government Officers Superannuation Committee (NILGOSC), with $7.3 billion in AUM, held over one fifth of the companies in the S&P 500, and voted against pay at 94% of them.

In addition, several UK pension funds use the voting services from Pensions and Investments Research Consultant (PIRC). Among these are the pension funds are Lancashire County, Suffolk County, Islington Council, North Yorkshire Pension Fund, and others. It is very likely, then, that these funds would have voted against 62% of Overpaid CEO packages.

As can be noted in the above figure, many pension fund votes settle around the level of opposition of the leading proxy advisors at these companies, 44% and 54% for ISS and Glass Lewis, respectively. This suggests they may simply vote the guidelines directly. The University of California is not listed above because we were unable to get their records, but follows ISS’s recommendations. However, more and more public pension funds are showing keener analysis and voting against companies even where the advisors recommend in favor.  

This year for the first time in the report we are including a table that allows readers to view results from specific votes at particular companies. On the list we included a number of examples of prominent companies with evidence of overpay or problematic practices.

We did not include votes at several companies where all advisors recommended against: Alphabet, Chesapeake, Mylan, Oracle, and SLGreen. 

General Electric’s compensation package serves as one example. It was supported by 89.2% of investors. Since that vote, the company revealed that the SEC is investigating accounting charges the company took following vastly under estimating the costs of long-term care and other policies. By February 2, 2018 the stock was down 40% from one year earlier. Well before this broke, several investors – primarily large pension funds -- had various concerns about compensation and voted against the advisory vote.

The largest investor in GE that voted against the CEO pay package was its 4th largest shareholder, Capital World/American Investors.

In some cases, the rationales against the vote are made available. Funds voting against GE’s compensation listed as their rationale such reasons as:

• Does not sufficiently align pay with performance, as it lacks disclosure and as there are features that are not in line with best practices (British Columbia Investment Management)

• The remuneration committee should not allow vesting of incentive awards for below median performance (BMO Global)

• The short-term incentive plan allows for positive discretionary adjustments to payout and this discretion was exercised. The long-term incentive program thresholds and maximums are not sufficiently disclosed (NEI Investment)

• The CEO's total compensation is greater than 150 times national median household income. The CEO's total compensation is greater than the median of its direct peers. (Trillium Asset Management)

The State of Wisconsin, however, voted in favor of the proposal with “qualified support.” In addition to raising concerns about perquisites and disclosure, the fund added, “There is a discretionary component to the short-term incentive program. A discretionary bonus was paid in the previous year.”

The chart of mutual funds below, however, shows that while some large funds voted against these excessive packages, there were some who voted for the majority.

As can be seen from the following chart, Pension Funds were more likely to vote against Overpaid CEO pay packages than were the mutual funds.

The Dodd-Frank Financial Reform Act gives shareholders the right to cast an advisory vote (Say-on-Pay) on CEO pay packages. Institutional investors, having the fiduciary responsibility to represent asset owners and pension beneficiaries need to use this right to make a statement that the system is out of balance and they want change. In addition, those who own mutual funds through 401(k)s and other investment vehicles must hold fund managers accountable and insist that representatives also exercise this responsibility rigorously. The waste of corporate resources impacts not only the company but polarizes society at large with far reaching implications on the economy. Shareholders have the tools to have their voices heard. Now they need to use them.

The table shows the 100 CEOs whose pay packages received the lowest votes. Vote data from Fund Votes; Compensation data from ISS

This table shows the 100 Most Overpaid, as calculated by just the HIP Investor regression analysis.

Although we, like many other analysts, find weak links between pay and performance, the usual justification claimed for high executive pay is that they are connected to profits and capital appreciation for the shareholders. We grant the assumption that pay should be determined by performance, and then use a basic statistical technique to map actual performance outcomes to predicted levels of pay. This prediction is compared to actual pay, to see how much the package exceeded such a prediction. Those with highest excess are ranked in the table below.

Executive pay data series included:

• Raw data: Simply looking at every ISS-identified executive’s pay package, in each year, as a single data point to be paired with performance for that year.

• CEO Pay, all years: The raw data is filtered based on ISS identification of the CEO, we adjusted Alphabet manually to make sure the CEO of Google (Sundar Pichai) is listed instead of Larry Page the CEO of Alphabet who only gets nominal pay. The series is supplemented using a Thomson Reuters Asset4 data set that captures the single largest pay package for each (company, year) pair. If ISS did not report a CEO for a given pair, and that pair was available in the Asset4 series, the Asset4 data was included. Where ISS identifies multiple co-CEOs, their pay packages are added together. Once the full set of pay packages is assembled, each (company, year) value is paired with the performance for that year, and this full set is used for the regression.

• CEO Pay, most recent available: Rather than using all (company, year) pairs, only the most recent available CEO pay package is used, along with performance trailing from that year.

• Summed: Aggregating all money paid out to ISS-identified executives for the year.

• Averaged: Dividing the previous summed data point by the number of distinct executives for the year.

Each type of executive pay could be reported in any year from 2007-2017, though not every company was reported for every year.

Financial performance series included:

• Return On Invested Capital (cash flow available to pay both debt and equity capital owners, adjusted for tax effects, divided by the total value of that capital). ROIC is sourced from Thomson Reuters WorldScope, which sources data from companies’ annual reports and investor filings.

• Total Return (capital gains and dividends) on the company’s primary equity. This is calculated from the ThomsonReuters DataStream Return Index series, using trailing periods behind June 30 of the year of the pay package as identified by ISS (or matching the year for the supplementary largest package data from Asset4). Both performance factors were calculated across one-year, three-year, and five-year windows, trailing behind each possible pay year.

This table summarizes over 100 mutual fund families on their CEO pay votes at all S&P 500 companies and the 100 companies with the most overpaid CEOs.

In order not to overweight votes on securities held more widely across a fund family compared to those held by only a few funds, each vote is recorded only once across a fund family. The ‘effective unique vote’ with respect to a specific resolution is the vote cast by at least 75% of funds across the entire fund family. In most instances, all funds across a fund family will vote identically. The 75% threshold is applied in cases where one or more funds within a family of funds vote inconsistently. Fund Votes’ Jackie Cook believes that the effective unique vote count method provides the most accurate method of analyzing a fund group’s position.

Where the 75% consensus threshold is not met, a ‘Mixed Vote’ is assigned and not counted as contributing to that fund’s overall level of support for Say-on-Pay resolutions included in the survey.

Data provided by ProxyInsight. Analysis by Jackie Cook

By HIP Investor (Onindo Khan and R.Paul Herman)

Large companies continue to boost CEO pay, to levels that are 300x the average worker.  The most overpaid CEOs collect more than 1000 times the average worker pay.  While defenders of high CEO pay contend that the rewards are for increased shareholder value, the truth is clear:  shareholders of companies with most overpaid CEOs typically underperform the stock market.

The first edition of As You Sow’s Most Overpaid CEOs report, published in 2015, identified the 100 leaders of firms significantly overpaying their chief executives. Advocates of high CEO pay contend that pay was high at these companies as a reward for high shareholder returns.  However, as seen in Figure 1, the average annual total shareholder returns in the 3 years prior (2/28/2012 to 2/28/2015) to a high pay package was essentially the same as it was at companies without the same levels of excess pay.  Then, in the nearly 3 years since (2/28/2015 to 1/1/2018), the group of companies with the most overpaid CEOs underperformed the S&P500.  If savvy investors sold, shorted or underweighted the100 most overpaid firms, they would have earned more than the stock market average.

When we look at the quantitative evidence, pay for performance is basically a myth.

Our HIP Investor team analyzed multiple financial indicators over different timeframes for all S&P500 companies and consistently found extremely low correlations (single digit correlation coefficients) between CEO pay and historical financial performance –  whether 1-, 3- or 5-year performance for financial ratios including Return on Equity (ROE), Return on Invested Capital (ROIC), and Total Shareholder Return(TSR) including capital gains and reinvested dividends.

Unbundling the most overpaid 100 into the worst decile of 10 firms, the remainder of the worst quartile, and the remaining three quartiles, most segments underperformed the S&P500 market average.  Again, this year, the worst 10 firms with massively overpaid CEOs destroyed shareholder value, losing money for investors – and dramatically lagging the market by an embarrassingly negative -15.6%. – and this even in one of the longest bull markets in history.

Surprisingly this year, the segment of companies in the second-worst quartile (ranked 26 to 50) in our 2015 report did outperform the S&P500.  Three companies are major contributors to that outperformance, with annualized 3-year returns above 20% per year. Three firms -- Northrop Grumman, Lockheed and Visa – dramatically reduced the level of CEO pay since 2015. In Figure 3, you can see the rank of Overpaid CEOs drop by 65, 93, and more than 145 ranked positions – meaning, they improved by falling lower on the most overpaid list. Corporations and boards are starting to react to mounting pressure and empirical validation of more sensible pay for CEOs.

Figure 3: EXAMPLES OF REDUCED CEO PAY
CORRELATE WITH HIGHER FINANCIAL RETURNS
Rank on Most Overpaid CEOs, and Annualized Total Shareholder Return

Company   2015 rank  2018 rank  3-yr* TSR as of 06/30/2017

Northrop   50               143               + 26.3 %
Lockheed   32               97               + 21.4 %
Visa            37               182             + 20.9 %

For consistency of the Most Overpaid 100 methodology, HIP Investor also analyzed the 2-year performance from the 2016 report until 12/31/2017, as seen in Figure 4, with similar results:  the most overpaid CEOs underperform financially.

While the worst decile lagged the market by 7.6%, the firms ranked 11 to 25 under-performed by 10.5%

Are Overpaid CEOs a reliable indicator of financial under-performance?  The evidence is compelling. Such disappointing returns are extremely unlikely. If 10,000 everyday investors chose 10 companies randomly from the S&P 500, only 8 of that 10,000 would have done worse than a portfolio comprised of the Top10 overpaid (a less than 1 in 1,000 frequency). This clearly shows that overpaying your CEO is a significant indicator for future underperformance – which we have focused on at HIP Investor since our founding in 2006.

Your portfolio is your money.  The companies and funds you invest in should be listening to you.  However, the most overpaid CEO pay packages are approved by Boards, elected by you the investor, and the mutual funds who hold their stocks.  We encourage you as investors to speak up, vote your “say on pay,” and pressure the companies and funds in your portfolio with this evidence – which can benefit your long-term financial performance and a more appropriate level of rewards for results achieved.

Rosanna Landis Weaver, Program Manager, Power of the Proxy: Executive Compensation, As You Sow

This is the fourth Most Overpaid CEOs report that Rosanna Landis Weaver has written for As You Sow. Her corporate governance career began with a position in the Corporate Affairs office at the International Brotherhood of Teamsters in 1992, supervising research on corporate governance and management practices. She joined the Investor Responsibility Research Center (IRRC) in 1999 and served as an expert on labor shareholder activism, writing reports on labor fund activism, compensation-related shareholder proposals, and golden parachutes. At Institutional Shareholder Services (ISS), which she joined in 2005, she worked on the executive compensation team as a senior analyst until 2010, with a particular focus on change of control packages, and analyzed Say-on-Pay resolutions. From 2010 to 2012, she was governance initiatives coordinator at Change to Win. Rosanna holds a BA in English from Goshen College and a Masters in American Studies from the University of Notre Dame.

This report was made possible by the generous support of the Stephen Silberstein Foundation. Additional support was provided by the Arntz Family Foundation, The Keith Campbell Foundation for the Environment, Firedoll Foundation, Hanley Foundation, The Libra Foundation, Manaaki Foundation, New Belgium Family Foundation, Roddenberry Foundation, Roy and Patricia Disney Family Foundation, and Singing Field Foundation.

Special thanks to:

• Many components of this report, including the section on pension funds, were based on data provided by ProxyInsight. The website was invaluable and Seth Duppstadt and Sophia Miles were prompt and patient with answering specific questions.

• The HIP Investor team conducted a regression analysis, upon which a key component of this report rests, and provided measures used in the sustainability section of the report. HIP, founded in 2006, rates 75,000 investments on all aspects of sustainability (including corporate CEO pay) and how it correlates to future risk and return potential. Onindo Khan, Director, Impact Analytics and R. Paul Herman, HIP’s CEO and founder, were extraordinarily helpful and responsive throughout the process.

• Much of the mutual fund section of the report was based on data provided by Fund Votes, an independent project started in 2004 by Jackie Cook (CookESG Research). Fund Votes tracks institutional proxy voting and Jackie Cook’s knowledge of mutual fund families and voting practices has been of great assistance.

• Economist Susan Holmberg served as a research consultant on this project. Her thoroughness and attention to detail were extremely valuable.

• Steven Clifford, for his fantastic book, “The CEO Pay Machine: How it Trashes America and How to Stop It,” and for participating in our webinar.

• The As You Sow team; (alphabetically) Andrew Behar, Betsy McMahon, Cody Mitcheltree, Cyrus Nemati, and Zoey Olbum as well as our interns. Thanks also to digital designer Sarah Weingust, copy editor Miriam Holzman-Sharman, John Opet of Art270, and Royce Wells of Comrade agency for his work on website creation.

Disclaimer

The aggregated information comprising The Most Overpaid CEOs 2018 represents a snapshot in time of publicly available information regarding shareholder voting with U.S. public companies that may be on the proxy statements and voted on at annual general meetings in 2017. 

The information provided in The Most Overpaid CEOs 2018 is provided “AS IS” without warranty of any kind. As You Sow makes no representations and provides no warranties regarding any information or opinions provided herein, including, but not limited to, the advisability of investing in any particular company or investment fund or other vehicle. While we have obtained information believed to be objectively reliable, As You Sow or any of its employees, officers, directors, trustees, or agents, shall not be responsible or liable, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with use of or reliance on any information contained herein, including, but not limited to, lost profits or punitive or consequential damages. Past performance is not indicative of future returns. 

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