Why Investors Are Pushing Back on Massive CEO Pay Hikes

EExcessive CEO compensation is under threat. Large companies’ workers are protesting against large CEO pay increases, while shareholders at nearly two dozen U.S. major companies rejected executive-pay packages as a result of the wide pay gap between employees and chief executives.

Due to the COVID-19 pandemic, millions of Americans were left struggling to meet their financial obligations. These difficult times were not easy for CEOs. The average chief executive of an S&P 500 company earned $14.5 million last year, up 17.1% from 2020. One executive made $200 million, while others earned as high as $200,000,000 in one year. This was because company boards granted large stock grants to executives who were responsible for guiding businesses through the epidemic.

Not every chief executive is so lucky. In May, investors at Intel’s annual shareholder meeting voted against supporting a compensation package for Intel CEO Pat Gelsinger that would have included a payout of as much as $178.6 million. In May, shareholders also rejected a $52.6million retention bonus for JPMorgan Chase CEO Jamie Dimon.

This is just one of many declining supports for lavishing riches on the C-suite. Median investor support for executive bonuses is at its lowest level since these so-called say-on-pay votes became mandatory in 2011, according to ISS Corporate Solutions, and it’s trending that way again for the rest of 2022. Twelve S&P 500 companies have already failed to secure majority support for their say-on-pay proposals this year, with more vote results yet to come.

Investor pushback against CEO pay raises

“I think something noteworthy is going on in terms of investors feeling more emboldened to express their dissatisfaction with these payouts,” says Brian Johnson, an executive director with ISS Corporate Solutions, which researches CEO pay and advises shareholders on voting.

“Investors are rightly getting frustrated with the excessive pay given to executives,” says Rosanna Weaver, who analyzes executive compensation shareholder proposals for As You Sow, a non-profit shareholder advocacy organization. “We’re seeing a shift in that some shareholders are flat out saying this pay is too much.”

The corporate boards doling out giant one-time awards say there’s a reason for their lavish proposed spending. Coming off a strong year for the stock market, during which the S&P 500 gained 26.9%, companies want to retain their high-performing leaders and reward them for managing through the pandemic. These retention bonuses are often in stock form and can be worth millions and designed to encourage executives to do more during new challenges such as high inflation or disruptions to supply chains.

However, not all shareholders buy into this philosophy.

Weaver states that many companies lowered their performance targets in the Covid-19 epidemic, prompting shareholders to question how and why they were calculating pay packages. Norwegian Cruise Line Holdings offered to pay its CEO $36.4m, which included a $2.8 million bonus. However, the company suffered a $4B loss in 2018. A overwhelming 83% vote of shareholders opposed it.

Historically, it’s rare for companies to get less than 90% support on these votes, Johnson says, but growing scrutiny of compensation practices is part of a broader trend.

“The pandemic shifted public sentiment to at least focus on this issue a bit more as the justice and fairness of it really came to light,” says Melissa Walton, a research associate at As You Sow supporting the Executive Compensation and Say on Climate programs. “Just consider how workers were treated and how much of their pay was at risk due to the pandemic, compared to CEOs getting all this protection.”

Worker dissatisfaction is growing

While anger about the growing pay gap is well-documented for many years, this sentiment may now be reaching investors. Workers are organizing unions across the country to demand higher wages, while some quit their jobs in search of better paying work elsewhere. This “Great Resignation” of workers saw more than 4 million quits during April 2021 alone. Both political parties have been trying to reduce the inequality.

The Institute for Policy Studies released a report earlier this week on 300 publicly traded corporations with the lowest average worker salary. In 2021, 670 times more than the average employee earned by the CEO of these 300 companies. The highest paid chief executives in IPS’s sample were Amazon CEO Andy Jassy, who made $212.7 million last year (or 6,474 times the $32,855 take-home pay of Amazon’s typical worker); Estee Lauder CEO Fabrizio Freda, whose 2021 compensation was $66.0 million (or 1,965 times more than the company paid its typical employee); and Penn National Gaming CEO Jay Snowden, who received a $65.9 million payout (or 1,942 times the company’s median pay).

Even if regular employees do receive a raise in their pay, this is still a small amount compared with the bonuses and other awards that CEOs get. “They’re certainly not keeping pace with inflation,” Johnson says. “There’s a disconnect between a CEO getting a 9% raise while the broader population—the rank-and-file employees—likely didn’t get this 9% raise in their paycheck.”

Companies could be subject to greater investor attention regarding the wage gap. However, there are no signs that it’s happening. Poor showings in a say-on-pay vote most often prompts a company’s board to remove their compensation committee members or restructure pay packages. This can in turn lead to “peer benchmarking,” when companies begin evaluating their proposed salaries against other companies, Walton says, but might not have large-scale, industry-wide effects on CEO pay.

“Executives traditionally have played a large role in bringing in board members, picking those who are more likely to be polite and acquiescent,” Weaver says. “For a long period of time, there wasn’t enough attention given to the way CEO pay was creeping up.”

Early results from say-on-pay voting indicate that people are more upset at how much CEOs make.

“Too much of being a CEO has become an entitlement,” says Weaver. “It’s supposed to be performance-based but in reality it’s treated like an entitlement.”

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