When it comes to CEO salaries, you don’t always get what you pay for.
A report from As You Sow, a shareholder advocacy organization, identified 100 companies that underperformed relative to the average S&P 500 company and still paid their chief executives richly.
“Year after year, these overpaid CEOs underperform. And especially during Covid when there were layoffs and lower revenues, some CEOs got higher pay,” says R. Paul Herman, founder and CEO of HIP Investor, a San Francisco-based sustainability ratings, data, and analytics provider that performed the analysis on the CEO pay packages.
The three most overpaid CEOs were at Paycom Software (ticker: PAYC), Norwegian Cruise Line ( NCLH ), and General Electric ( GE ), the study found.
The As You Sow report looks at three factors in determining if CEOs earned their pay. First, HIP calculates how much CEOs should have earned in pay based on total shareholder return over the past five years. Any salary (including benefits, perks, and stock options) over that amount was characterized as excess pay. Second, As You Sow analyzed shareholder votes on pay for each company, looking at the percentage of shares that voted against the pay. Finally, both As You Sow and HIP evaluated the CEO-to-worker pay ratios for each company.
HIP Investor looked at the total stock performance, including dividend reinvestment, of the companies whose CEOs made the As You Sow overpaid list. On average, the group of 100 firms excessively paying their CEO lag behind the S&P 500 by 1 to 3 percentage points a year since 2015. Cumulatively over the past seven years of this CEO pay report, a portfolio of 100 most overpaid CEOs lagged behind their remaining 400 counterparts by 25 percentage points: The 100 companies with the overpaid CEOs returned 109% in total since 2015, while the remaining S&P 500 companies that didn’t make the overpaid list returned 134%.
This encapsulates the argument some sustainable investors have used for years: You may not care about pay equity or societal issues when you invest in a company. But steering your portfolio toward companies that don’t overpay their execs is still a good move in terms of stock performance.
“Investors and fund managers would be wise to avoid firms with overpaid CEOs, via divesting or underweighting—and hold boards accountable by voting your proxies,” Herman said.
Sustainable investors, as it happens, are leading the charge on excessive CEO pay. As You Sow notes that shareholder opposition to big CEO packages has increased dramatically.
“This year we have seen the highest level of very strong opposition that we’ve ever seen,” says Rosanna Landis Weaver, executive compensation program manager at At You Sow and author of the report.
10 Most Overpaid
* The pay packages evaluated were those voted on in the year prior to June 30, 2021.
Source: As You Sow
In 2021, a record 16 companies had CEO pay packages rejected by more than half of the shareholders, a 60% jump from 10 in 2020 and more than double the seven in 2019, according to the report.
The shareholder votes on CEO pay are about “trying to bring more accountability for that compensation. And, in the best case, close the gap between worker pay and CEO,” says Herman.
While there has been growing rejection of CEO pay packages, change has been “unconscionably slow,” the report said. The big three asset managers, BlackRock ( BLK ), Vanguard, and SSgA, control about 20% of all shareholder votes and are still approving 95% of S&P 500 CEO pay packages. “The number of rejections is far from what it should be,” the report found. “This pay growth is both unjustified and decidedly not in the best interest of shareholders.”
Chad Richison, founder and CEO of payroll processor Paycom topped the list of overpaid chief executives with pay of $211 million, as reported in the proxy statement. Median worker pay at Paycom was $71, 259. That is a CEO-to-worker pay ratio of 2963:1.
Paycom disagreed with the notion its chief is overpaid. It said that under Richison’s leadership, the company had “grown tremendously since its IPO in 2014, including a 20-fold increase in the company’s stock price” and that his 2020 performance equity award depends entirely on the CEO achieving “aggressive performance goals.”
Frank Del Rio, CEO of Norwegian Cruise Line (NCHL), ranked second on the list with pay of $36 million compared with media worker pay of $30,635, or a CEO-to-worker pay ratio of 1188:1.
A spokesperson for Norwegian Cruise said the board based its 2020 compensation decision “on the belief that it was essential to keep our management team intact to steer our company through the extraordinary impacts of Covid-19, ensure stability in the organization, and to ultimately drive our company’s recovery.”
Similarly, Hilton ( HLT ), whose CEO Christopher J. Nasseta, was sixth on the list, noted the extraordinary circumstances of the compensation period. “2020 was a year like no other, and the outsized impact of the global pandemic on the hospitality industry meant we needed to reassess our approach to executive compensation to ensure we continued to drive performance through an unprecedented period for our industry,” a spokesperson said.
No. 10 on the list, Regeneron (REGN,) said CEO Leonard S. Schleifer’s “increased compensation in 2020 was a special front-loaded performance-based equity grant, which replaces five years of CEO annual equity awards with a single grant of performance-restricted stock units.”
Discovery (DISCA), No. 8 on the list declined to comment. General Electric (GE), Nike (NKE), Howmet Aerospace (HWM), and Chipotle ( CMG ), Nos. 3, 5, 7, and 9 on the list, respectively, didn’t respond to Barron’s request for comment.
Source: Barron’s
