Will CEO Pay Excess Outlast Our Shareholder Spring

Sam Pizzigati

A string of surprising ‘say on pay’ votes has some executive pay critics sensing an impending revolution in corporate boardrooms. But that ‘revolution’ won’t amount to much until mainstream CEO pay reformers start factoring worker pay into the corporate compensation equation.

On every day of the year, save one, America’s corporate CEOs can confidently strut about and face no open, unscripted public challenge. That one: the day their annual corporate shareholders meeting takes place.

On that dicey day, in theory at least, America’s top corporate executives actually have to face Americans they can’t boss around or defiantly ignore.

All this makes the annual shareholder meetings that blossom every spring a prime stage for political theater, a wonderful opportunity to spotlight corporate greed grabs and the senior execs who make them.

Activists of the Occupy Wall Street movement have this spring been seizing this opportunity, week after week, at the annual meetings of companies that have ranged from Wells Fargo and Verizon to General Electric and Bank of America. Their Occupy movement protests have made headlines coast to coast.

But some CEO critics this spring have had more than political theater on their minds. They’ve been seeking to actually change corporate behavior, particularly on executive pay, via ballot battles on shareholder annual meeting resolutions.

These critics have a new weapon in their arsenal. The two-year-old Dodd-Frank Wall Street Reform and Consumer Protection Act gives shareholders the right to hold advisory votes on top executive pay plans.

Last year, the first with this “say on pay” mandate in play, shareholders voted no on pay plans at 36 U.S. companies. Shareholders so far this year have delivered as many as 14 no verdicts, reports compensation analyst Broc Romanek, most famously at the annual meeting of the bailed-out banking colossus Citigroup.

These votes, shareholder advocate Greg Ruel claimed last week, have America’s corporate elite, running scared. Top execs are “taking the non-binding say on pay vote very seriously” and accepting “undeniable” change in CEO pay policy.

Some observers of our corporate world even see a veritable business revolution unfolding right before our eyes.

“The weapons might be proxy forms rather than Molotov cocktails, and the rebellions might be staged in hotel conference rooms rather than on the streets,” as Wall Street Journal MarketWatch analyst Matthew Lynn gushed Wednesday. “But there is still a whiff of insurrection in the air.”

Other analysts are hearing echoes of Tahrir Square. They’ve taken to calling the current round of corporate annual meetings our “shareholder spring.” Even Felix Salmon, the widely respected and normally unflappable Reuters financial analyst, is sensing a fundamental shift.

Corporate boards, Salmon wrote last week, are now realizing “they answer to shareholders, and that the biggest shareholders — pension plans, mutual funds, that kind of thing — are ultimately representing the interests of the 99 percent.” With shareholders mobilizing, contends Salmon, CEOs who’ve been awarding themselves “ever more obscene quantities of money” now know their “gig is up.”

In fact, despite the ‘say on pay’ hoopla, the CEO “gig” is still going strong. The most notorious of America’s CEOs — the execs who run the nation’s top banks — are doing just fine. Bank CEO pay, reports the American Banker trade journal, rose a median 16 percent in 2011, the first year with “say on pay” on the books and the same year that bank stocks lost an average 23 percent.

Overall U.S. chief executive compensation, adds GMI Ratings, jumped over 15 percent in 2011, about 15 percent more than overall share values. And CEO pay down the road, GMI observes, stands poised to escalate even more sharply. Top execs are sitting on a “sleeping time-bomb of stock option grants.”

Back in 2009, GMI’s Paul Hodgson explains, corporate boards reacted to Wall Street’s nosedive by showering top execs with “mega” grants of stock options. Execs who had been receiving 200,000 option grants annually when their company shares were fetching $50 would suddenly — with their company shares selling for only $10 — find their pockets stuffed with a million option grants.

Today, with those $10 shares now back at their pre-crash $50 level, these fortunate execs now stand to pocket $40 million in profits on their 2009 options.

Corporate flacks will no doubt defend those windfalls as “performance” related. Executives who “perform” and raise their share price, the argument goes, deserve all the good fortune that comes their way. The mainstream shareholder activist movement, unfortunately, buys into this “performance” ethos.

One shareholder movement stalwart, the advisory firm Investor Shareholder Services, counts as progress any move that ties CEO pay to “performance” — and won’t recommend a no “say on pay” vote, notes analyst Steven Davidoff, if a corporate board has tied most of its CEO pay to a performance “metric,” even if the resulting payout to the CEO could mount into the tens of millions.

But not all activists in the shareholder wars are swallowing the “pay for performance” line. True enterprise success, as AFL-CIO president Richard Trumka is emphasizing, hinges on far more than what the “performance” of any single executive might contribute.

“If a CEO is treated to a windfall after a profitable year, there is no good reason for others at the same company to be left in the dust with minimal raises or no raises at all,” Trumka observed earlier this month. “Ultimately, the economic prosperity of our country is a shared effort, and it should be a shared reward.”

That reward over recent decades, of course, has been anything but shared. Back in 1980, the latest data show, CEOs averaged just 42 times U.S. worker pay. Last year’s average: 380 times.

America’s unions and other public interest groups active in Americans for Financial Reform are now pushing to have a “shared success” framework built into corporate compensation. More specifically, they want individual U.S. corporations measured by a “pay ratio” yardstick.

This “pay ratio” measuring should already be taking place. The same Dodd-Frank legislation that requires “say on pay” also requires publicly traded corporations to annually disclose the ratio between their CEO and worker pay.

This disclosure, notes the AFL-CIO’s Trumka, would make for “a simple and easy way to encourage companies to consider CEO pay in the context of their entire workforce and restrain the level of CEO pay.”

But America’s power-suit brigades have no interest in restraining CEO pay, and they’ve been feverishly lobbying to derail the Dodd-Frank pay-ratio mandate. The Securities and Exchange Commission, the federal watchdog agency with authority over Wall Street, has so far played along with the derailing, by dragging its feet on writing the regulations necessary to enforce pay-ratio disclosure.

Sign up for To MuchThe AFL-CIO and other groups are demanding that the SEC move swiftly to issue those regulations and allow the Dodd-Frank disclosure to begin. They’ve organized a public campaign to help speed that demand. And some top media editorial writers are now actively backing the disclosure push.

This drumbeat for a pay-ratio standard — beyond the “pay for performance” metrics that CEOs can so routinely game — figures to pound still louder in the months ahead. That’s because newly elected French president Francois Hollande has pledged to apply a 20-to-1 ratio between the pay of top executives and workers at corporations where the French government owns a controlling interest.

Applying this ratio would drop CEO pay at the French utility giant EDF from about $2.1 million in U.S. dollars to under $700,000.

U.S. federal officials, with Dodd-Frank’s pay-ratio disclosure mandate enforced, could easily press for the same standard at bailed-out corporations where American taxpayers still hold a shareholder stake. With Dodd-Frank’s pay ratio in effect, even stronger steps would become feasible.

Congress, for instance, could deny government contracts to U.S. corporations whose top executives are taking home over 20 or 50 or 100 times what their workers are making. That sort of move just might give us a real “whiff of insurrection.”

Sam Pizzigati edits Too Much, the online weekly on excess and inequality published by the Institute for Policy Studies. Read the current issue or sign up here to receive Too Much in your email inbox.

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