Shareholders dug in their heels last year, according to a new report from As You Sow, a shareholder advocacy nonprofit organization.
A record 16 companies had CEO pay packages rejected by more than half of the shareholders, up from 10 in 2020 and just seven in 2019.
The report noted that by using a calculation that excludes management and “insiders” and includes only institutional shareholders, the number of CEO pay packages rejected by more than a majority of institutionally held shares was 29, compared with 15 the year before.
The increase in opposition appears to be based on more companies employing questionable practices and metrics in setting CEO pay, rather than on the total amount of pay. For example, companies that changed CEO pay-performance metrics using the pandemic as the reason received high levels of negative votes from shareholders.
Because CEO pay is highly peer-group-linked, an increase that may appear justified at one company then inflates pay at many other companies in the company’s peer group, according to the report. This ratchets up the pay of all CEOs, and shareholders do not seem to object, it said.
“There’s never been a year with this number of high opposition votes against pay in the eight years of this report,” Rosanna Landis Weaver, executive compensation program manager at As You Sow and the report’s author, said in a statement.
“While compensation committees like to tout the amount of the pay package that is ‘at-risk,’ the pandemic challenged the notion that CEO pay will always rise and fall with the performance of the company. Some boards acted as if pay for performance didn’t matter when COVID-19 was involved, and shareholders angrily rejected those packages.”
Weaver said more shareholders should vote against the quantum of pay, not just particular bad practices. “The growth in CEO pay is unjustified and not in the best interests of shareholders.”
According to R. Paul Herman, founder and chief executive of HIP (Human Impact + Profit) Investor, “Since 2015, year after year, boards are approving pay packages for CEOs that could otherwise go to shareholders — and each year millions of dollars that could boost everyday worker pay, higher R&D innovation or increased investor dividends instead overpay CEOs for lackluster results.”
Worse, Herman said, the misallocation systematically contributes to underperformance of many firms’ total stock return. “HIP Investor calculates a lag of -1% to -3% per year from this underperformance of the 100 Most Overpaid CEOs relative to the overall S&P 500, and cumulatively totals -20% under-performance from February 2015 through December 2021.”
To identify the 100 most overpaid CEOs, As You Sow evaluated CEO pay at S&P 500 companies using data provided by Institutional Shareholder Services. HIP Investor provided further data and analysis to compute what the pay of the CEO would be, assuming such pay is related to cumulative total shareholder return over the previous five years, using a statistical regression model.
This provided a formula to calculate how much excess pay each CEO receives. As You Sow then added data ranking companies by what percentage of company shares voted against the CEO pay package.
See the gallery for the nine most overpaid CEOs in financial services whose pay packages were voted on in the year prior to June 30, 2021.