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Ixnay on ‘Say on Pay’

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The “say on pay” experiment is a bust.

The Dodd-Frank financial overhaul law gave shareholders the ability to vote on the pay packages of top executives, and it turns out that they fall over themselves to approve.

More companies are achieving Fidel Castro-like election results this year than in the first two years since Dodd-Frank started requiring such votes. A full 72 percent of companies reporting votes so far have received 90 percent or more shareholder approval for their pay packages. That compares with 69 percent in both 2012 and 2011, according to Equilar, an executive compensation consultancy.

And shareholders are feeling relatively magnanimous about the rotten apples, too. Only 41 companies out of nearly 1,800 failed so far this year on say-on-pay votes, compared with 49 companies at this point last year, according to the companies tracked by the executive compensation consulting firm Semler Brossy.

Troublingly, investors pass larger companies more readily than they do smaller firms. But the chief executive of a large company deserves more scrutiny over pay, not less. That’s partly because the livelihoods of so many people depend on people running big firms, but also because those executives are largely caretakers of already established institutions. Typically, they have displayed neither vision nor entrepreneurialism but an ability to rise through a bureaucracy without offending anyone. When they arrive on the throne, they typically do a little bit better or a little bit worse than their predecessor, without distinguishing themselves in the least. Yet, they get paid as if they were the second coming of Henry Ford.

The final strike against say-on-pay is that it has had no impact on the level of compensation. Quite the opposite. Pay for chief executives was at its highest level ever last year, up 6.5 percent from a year earlier, according to an Equilar analysis. After a brief dip at the height of the recession, pay for corporate chieftains rose 6 percent in 2011 and soared 24 percent in 2010. For those keeping score at home, that sharply outpaces inflation, which was a piddling 1.7 percent last year. Median worker pay didn’t keep up with rising prices in those years.

These results demonstrate that shareholders don’t care about pay if their stocks are going up. But if say-on-pay merely takes the temperature of the stock market, why bother? Stocks usually go up and down together, especially in a market driven more by Federal Reserve monetary policy than by individual corporate performance.

Permission is hereby granted to relinquish any hope that shareholders will try to distinguish between the chief executives who are “worth” their giant pay packages and those who aren’t.

But what did anyone expect from say-on-pay? It’s yet another example of Dodd-Frank’s ineptitude and impoverishment. The Securities and Exchange Commission finalized its say-on-pay rule, required by the financial overhaul, in January 2011. And what did it come up with?

The vote was nonbinding. It’s as if the government wanted to allow shareholders to conduct a primal scream. Instead, they whisper sweet nothings. And companies are required to hold the votes only once every three years. So the rule didn’t force companies to comply with anything. Instead of making policy to address the problem, Congress and the regulators came up with toothless P.R.

Corporate chieftains may think: Whaddya gonna do, sue me? Well, that’s been tried. And the plaintiffs’ bar has whiffed. According to an analysis by the law firm Haynes and Boone, a series of lawsuits filed in 2010 and 2011 alleging breaches of fiduciary duty went nowhere. The following year, a bunch of suits contended that companies had inadequately disclosed their compensation plans. The suits accused directors of violating their duties, and charged the companies with aiding and abetting, but they, too, mostly fizzled.

There is a clear winner, here, of course. As a result of say-on-pay, the SEC now requires tables upon tables of indecipherable material, so companies indulge in an orgy of disclosure. As with most regulation these days, corporate law firm partners emerge victorious, on the backs of the poor associates who have to wade through these materials in the wee morning hours.

So that was a bust. We can’t count on shareholders to be assertive. The plaintiffs’ lawyers, unsurprisingly, can’t make much hay out of possible noncompliance with a nonbinding vote.

The best we could hope for is that say-on-pay shifted the social norms about compensation. Maybe executives would be embarrassed not to win fulsome support from their shareholders. Well, it turns out that many millions of dollars comforts a chief executive just fine on those lonely nights after the rare shareholder rebuke.

And putting shareholders in charge of enforcing social norms is like having Lindsay Lohan advise Miley Cyrus on temperance. Active managers are an underperforming bunch. They aren’t exactly rushing to call attention to other underperformers. And as Harvard Business Review’s Justin Fox has pointed out, they share an interest with chief executives in remaining overpaid.

A new study from the left-leaning Economic Policy Institute notes that the rise in incomes for the top 1 percent — and especially the top 0.1 percent — is mostly accounted for by the rise in compensation for top corporate executives and finance professionals. Without those two groups, income inequality in this country would be substantially lessened. And the institute’s study contends, persuasively, that this rise has been in excess of what these people would require in order to be motivated to do their jobs.

The pay problem is often ascribed to crony boards of directors paying off their buddies so they in turn can receive excess pay. But having shareholders judge these packages replicates the problem. One overpaid class rewards another.

Of course, it must be the fault of the rank-and-file shareholders and not voting schemes that are arranged to get the executives what they want.  Proxy votes, non-votes, and a few numbers games are easy to run to sway any sort of shareholder input.

The stone-to-bird ratio on this is pretty good, too.  Manipulate a few numbers that nobody can really track or authenticate (and are basically legitimate based on company governance by-laws), and not only do you get to go back to voting yourself huge raises, but you absolve yourself of responsibility by shifting blame to the masses.

“Dodd-Frank started requiring…” meaningless exercise… pure posturing.

“The final strike against say-on-pay is that it has had no impact on the level of compensation. Quite the opposite…” … what’s new? The law of unintended consequences always trumps Washington.

The true reason for Dodd-Frank was for the Ruling Class to help their political backers, the legal profession et al, to find new ways of billing their clients.

Mutual fund managers are forced to vote proxies and file quarterly reports on how they voted, an inordinate waste of time, but easily avoided by outsourcing the function to a third party service provider with the instructions to vote per management’s preferences, which explains why “A full 72 percent of companies reporting votes so far have received 90 percent or more shareholder approval for their pay packages.”

The solution lies in Norway, where companies have a third layer of corporate governance (a practice also adopted by The Netherlands and Brazil, among others), called the Corporate Assembly – see StatOil’s annual report for more detail. CEO compensation in 2012 was $2.176 million (cash only; the Norwegian government considers stock options akin to a criminal activity and its Sovereign Wealth Fund, now worth more than $500 billion, does not invest in Norwegian companies that award stock options to employees), with a basic salary of $1.184 million. “Subject to specific terms in his pension agreement of 7 March 2004, the chief executive officer is entitled to a pension amounting to 66% of pensionable salary and a retirement age of 62. The full service period is 15 years.” – 2012 20F.

I am but a wee little citizen who worked her butt off for over 41 years. With that said it is, in my opinion, it is not the purpose of government to be involved politically or legislative on compensation matters. Setting a minimum wage at the federal level is plain wrong. Minimum wage is a States issue. What a company pays its CEO is between the company, its board and stockholders. If stockholders do not participate or are pleased—none of our business and certainly none of Propublica’s business.

What’s more worrisome is that this establishes that voting is a very poor way to control excessive behavior by those in power. The same applies to the government. Which is why we can never get the dramatically smaller government we need.

pgillenw, I agree with you, but the Norwegian government is not dictating compensation policies. Due to the oil revenues, which they know won’t last forever, the government runs a 15% budget surplus every year, which has resulted in a sizeable Sovereign Wealth Fund, now equal to more than $100,000 per man woman and child. Some of these funds are invested in Norwegian companies, but only on certain conditions. There has to be a Corporate Assembly, the second layer of corporate governance and compensation has to be paid in cash. They have no fondness for the subterfuge of Black-Scholes and transfer of wealth from shareholders to insiders that accompanies the whole process.

According to our founding fathers the purpose of government is very limited, but we have obviously not paid attention, as a $4 trillion budget and $17 trillion of on-balance sheet and ~$70 trillion in unfunded mandates demonstrate.

Dodd-Franks was just another futile attempt of legislators to pander to their various constituencies, with the legal and financial complex being the main beneficiaries, not that it was sold to the gullible public in that manner.

Propublica is stirring the debate and trying to fulfill the Fourth Estate’s true mandate, which is to monitor the political process and to point out abuse and inconsistency, etc., unlike mainstream media that are the courtiers of Washington.

Richard Tebaldic

July 7, 2013, 4:24 p.m.

Another show from Dodd-Frank! I wonder how much money they traded that act for. These guys belong in jail right next to Maddoff! I can’t think of any legislation they wrote or assisted in getting passed that did something for the taxpayer. If Dodd is still in office, he should be forced out. How much money did they raise for the Democratic party for their “favors”? Using our tax money to get voted into office. That’s immoral. It’s legislators like these two jerks that give the other 10% a bad name..
Ha-ha! (might be true, eh?

What on Earth do we expect? Who are the shareholders; those holding enough shares to actually get the attention of the Board and the CEO?
Wait for it… Wait for it… Board Members and CEOs of other companies!!!
Does anyone think for a nanosecond that this group will be anything bit supportive?
If so, I’ve got a great real estate deal to run by you…

Celestina Poltrock

Dec. 18, 2013, 5:41 a.m.

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Jesse Eisinger

About The Trade

In this column, co-published with New York Times' DealBook, I monitor the financial markets to hold companies, executives and government officials accountable for their actions. Tips? Praise? Contact me at .(JavaScript must be enabled to view this email address)