Yesterday As You Sow, the organization I work with, released our report on the 100 Most Overpaid CEOs in the S&P 500. I’ve been working on this for months, digging deep into the details. Before the webinar, another a panel member – who is also a movie review – was talking about current films, and someone came up with the “50 shades of pay” phrase in the title here. Started out as joke, but it might have made an appropriate title for the report. My reasons – detailed below -- have nothing to do with how shareholders need to give CEOs a spanking. And if you don’t want to you can download the full report at: http://www.asyousow.org/...
First, and I know I’m preaching to the choir here, CEO pay grew an astounding 937% over the past 35 years. The explosion in CEO pay outpaces growth in the stock market and economic productivity, and way outpaces growth in pay to working people. It is not good for the companies, the shareholders, the customers, the other employees, the economy, and society as a whole to keep putting more and more money in the hands of just a few people.
In working on this report we identified over 30 different poor pay flags. The methodology was complex because exec comp is crazy complex and confusing. In order to hide the true cost to the company and to reduce taxes, CEO pay has come to be structured in overly-complex ways, with all kinds of currencies (e.g. stock awards and options).
There may not be quite 50 kinds of pay, but the number must be pretty close. Every proxy statement includes what’s called a summary compensation table supposedly to provide easy insight, but has half a dozen columns and footnotes in tiny print.
Our report attempts to be both as objective and comprehensive as possible to cover all of those categories, each of which is open to abuse in its own ways.
Here are a few of the shades of executive pay:
The first is salary, one you may get yourselves. Way back in the days of Clinton, Congress passed Section 162(m) of the Internal Revenue code capping tax-deductibility of CEO salary at $1 million – in an attempt to curb increased executive pay. (Instead it created what many called the “performance pay loophole” which I’ll get to in a minute.) The rule prohibited corporate tax deductions for executive pay over $1 million unless that pay is rewarded for meeting performance goals. At the time some companies actually explicitly cut their salaries, and for a while $1 million was the typical salary. But they’ve been creeping up. And CEO’s, more than children, love the “the other kids are doing it” defense.
The next column in the summary compensation table might be the most misleading and confusing. The column is titled ‘bonus’ but it doesn’t mean earned bonuses based on measurable goals. It’s only the discretionary cash kind. These don’t qualify under 162(m) and thus come at higher cost to the companies and shareholders.
The next two summary comp columns have to do with equity compensation, and equity comp comes in as many, many varieties. There’s time based restricted stock (known by some as pay for pulse), there’s performance based restricted stock. And there are stock options. The idea behind options was that execs would benefit from increase in stock price. That’s all well and good. But over the years it has been a tremendous proof of the old adage, “it’s better to be lucky than smart.” Folks who got options in the midst of the financial crisis are getting a windfall because the market recovered, not because they were brilliant.
Another prism for understanding income inequality in the recent history of the United States is to look at the decline of retirement security for most of us. In 1983, 62% of employees had defined benefit pensions, today only 17% do. There has been some decline of pensions among CEOs, but at a slower rate and many executives are “grandfathered in.
In addition to pensions and 401ks available to employees, there are other tax-advantaged retirement saving vehicles available to CEOs. To call the accumulation of wealth “retirement savings” is a complete misnomer when the amount is well beyond what could be spent in the course of retirement, and thus essentially become tax-advantaged wealth accumulation plans for future generations.
The benefits are provided under multiple complex systems including SERPS (Supplemental Executive Retirement Plans), and special deferred compensation plans (including some that have guaranteed above market interest rates on any savings). And we’re talking tons of money. There were 15 guys (all guys) with guaranteed retirement packages over $50,000,000.
The final column in the Summary Compensation table is a catch all “All Other Compensation.” These include disclosure on perquisites – ranging from personal use of the company plane (sometimes to go to Davos and talk about the hazards of income inequality) to relocation costs to lavish home security. I’ve seen people paid millions of dollars who get an extra $10,000 to help them with their financial planning. Myself, I cover my own financial planning, it pretty much involves saving everything that isn’t spent on bills.
So you can see why shareholders are all tied up in knots.
Other parts of the report (which again, you can download http://www.asyousow.org/...)
The report itself identifies the companies, looks at how mutual funds and pension funds are voting on these packages, and also at some of the directors who serve on the companies.
Happy to diary on those topics later if there’s interest.
And now let the puns begin!