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Overpaid CEOs paid ten times their performance

Staff writer |
Leading mutual funds and pension funds so far have taken little action to curb the "extraordinary misallocation of assets" represented by the excessive compensation of America’s top 100 overpaid CEOs, according to As You Sow.

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The report stats: "CEO compensation as it is currently structured does not work: Rather than incentivize sustainable growth it increases disproportionately by every measure, and receives no consequences. Too often it rewards deals above development and risk rather than return on invested capital.

The most overpaid CEOs represent an extraordinary misallocation of assets. Regression analysis showed 17 CEOs with compensation at least $20 million more in compensation in 2014 than they would have garnered if their pay had been aligned with performance.

For example, Discovery (owner of Discovery Channel, Animal Planet, and the Oprah Winfrey Network) awarded their CEO an astonishing $156 million in compensation.

If existing pay packages bore a simple linear relationship to performance, that pay would have been roughly $14 million – resulting in $142 million in excess pay.

"The Economic Policy Institute notes that over the period of 1978 to 2013, the inflation-adjusted pay of a typical worker grew by about 0.4 percent a year (a total of 10 percent over 35 years) while the pay of a typical CEO grew almost tenfold," the report says .

"CEO pay grew an astounding 997 percent over the past 36 years, greatly otpacing the S&P500, which has grown only 504 percent in this time period."

The company that ranked first for poor CEO pay practices last year, Nabors Industries, has seen such a decline in market capitalization that it was removed from the S&P 500. Of the 100 companies in the 2015 list, there are 66 that are repeats from last year.

Pension funds are making some progress on opposing high CEO pay. One of the funds with the greatest change was CalPERS, which last year opposed just 30 percent of the overpaid CEO pay packages, and this year increased that opposition level to 47 percent of the overpaid CEO pay packages, an increase of more than 50 percent its opposition.

CalPERS, with $300 billion assets under management as of December 31, 2014, is the second largest pension fund. The British Columbia Investment Management Corporation (bcIMC) which manages well over $120 of pension funds had the highest level of opposition (76 percent) to overpaid CEO pay packages of any pension fund we surveyed.

Mutual funds are far more likely to rubber stamp high CEO pay than are pension funds. Of the largest mutual funds, American and Schwab approved 65 percent of these packages, while Blackrock supported 97 percent of them. Some funds seem to routinely rubber stamp management pay practices, enabling the worst offenders and failing in their fiduciary duty.

TIAA-CREF, the leading retirement provider for teachers and college professors, is more likely to approve high-pay packages than almost any other institution of its size with support level of 97 percent.

For the second year in a row TCW, Steward, and Calamos voted in favor of pay packages at all the companies. Berkshire Hathaway also supported every one of the proposals it voted on, but only holds seven of the companies in their portfolio.

Socially responsible investing (SRI) mutual funds were more likely to vote against excessive pay packages.

Eleven SRI mutual funds were surveyed. Of these, one mutual fund, Green Century, failed to cast a vote either for or against any of the 40 say-on-pay resolutions that they voted on – instead abstaining on all.

Of the remaining 10 SRI mutual funds, four voted against more than 50 percent of the time and on average they opposed say-on-pay resolutions 50 percent of the time.

While they are more likely to vote against excessive pay packages than non-SRI mutual fund groups, there is a significant range in voting patterns – with Domini opposing all 27 resolutions that it voted on and Calvert opposing 87 percent of the 99 resolutions that they voted on.

Parnassus, on the other hand, opposed only three of the 25 resolutions that they voted on.

Directors play a key role in encouraging excessive CEO compensation. There are 21 directors who serve on two or more of the boards highlighted by As You Sow. Three directors serve on three such boards.

Retired Johnson & Johnson CEO William Weldon serves on the boards of CVS, Exxon Mobil, and JP Morgan – all three companies ranked in this study. Retired Exxon CEO Ray Irani serves on the compensation committee of Wynn Resorts.

It may be that such CEOs who were extraordinarily well-paid for their tenure are even less inclined to constrain current pay, even if best practices have changed.

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