Rosanna Landis Weaver reviews The CEO Pay Machine 

Our favorite expert on CEO pay, As You Sow’s Rosanna Landis Weaver, likes Steven Clifford’s new book, The CEO Pay Machine: How it Trashes America and How to Stop It.  We recommend the book and Weaver’s review:

Clifford takes apart all the components with a fresh eye. He is skeptical, for example, of the mantra of pay for performance. He notes that bonuses that don’t change behavior are a waste of money, and that many that do change behavior may change it for the worse. “All pay-for-performance systems cause more harm than good,” he writes. “They generate perverse incentives, undeserved and often absurdly high bonuses, and damage the companies that use them.” … He also speaks with great insight about the role of directors. “It’s impractical, if not impossible,” he notes, “for board members committed to being supportive players on the team to transform themselves into hard-nosed negotiators.”

Source: Book Review: The CEO Pay Machine – CEO Pay Updates: 2017 Proxy Season

Opioid Controversy: McKesson CEO’s Bonus Draws Shareholder Ire | Fortune.com

The Teamsters pension fund has written to shareholders about excessive compensation at McKesson: “It is staggering that Hammergren received a $1.1 million boost to his bonus just months after the company announced it had reached a record $150 million settlement with the DEA in a year the company faces mounting litigation, negative press and Congressional scrutiny.”

[John] Hammergren is consistently one of America’s highest-paid executives, and as such, his compensation has been scrutinized and pilloried over the years—in 2013, shareholders overwhelmingly said no to his pay package (something shareholders rarely ever do). But this year, a considerable amount of outrage over the CEO’s compensation is focused on a $1.1 million slice of his $97.6 million compensation pie—and that outrage is closely related to the country’s spiraling opioid crisis.The $1.1 million is the amount the McKesson board’s compensation committee boosted Hammergren’s annual bonus pay this year—a cherry on top of all that other cash—through the use of an “individual performance modifier,” an assessment that incorporates a range of non-financial metrics including alignment with the company’s much touted “ICARE” principles—Integrity, Customer first, Accountability, Respect, and Excellence. Good behavior, in essence.

The thing is, as Fortune reported in a feature story in June, the company’s behavior hasn’t been so good. McKesson (MCK, +0.98%) is currently embroiled in controversy around its role in the opioid epidemic; in January, the company settled, for a record $150 million, claims that it had failed to report large numbers of suspicious orders of prescription opioids to the DEA. As a result, McKesson, which accepted some responsibility in the federal settlement, will operate under an independent monitor for the next five years. Meanwhile, in West Virginia—where it shipped more than 100 million doses of highly addictive prescription pain pills in a period of six years—the state Attorney General has sued the company for violating the state’s controlled substances and consumer protection laws, and McKesson faces litigation brought by towns and counties across the state. Along with the nation’s other two major drug distributors, the company is also subject of a Congressional investigation.McKesson’s testimonials to its purported guiding principles, all the while, is what has really gotten under the skin of some investors who view them as mere lip service.

Source: Opioid Controversy: McKesson CEO’s Bonus Draws Shareholder Ire | Fortune.com

Renault Shareholders Narrowly Pass CEO Pay Over Government Opposition

Renault SA shareholders approved Carlos Ghosn’s 7 million-euro ($7.8 million) compensation for last year over the objections of the French government, which argued that the automaker’s chief executive officer is overpaid.

Shareholders voted 53 percent in favor of the CEO’s 2016 pay in an advisory decision at the company’s annual meeting on Thursday in Paris. The French state, which owns 19.7 percent of Renault, opposed Ghosn’s remuneration for the fourth time, a spokeswoman for the state’s participation agency said. In July last year, Renault’s board cut the variable component of Ghosn’s pay package by 20 percent, which wasn’t enough to satisfy the French government.

Source: Renault Shareholders Narrowly Pass CEO Pay Amid Controversy – Bloomberg

Pension Funds Vote “No” on Mylan Directors

Frank Glassner’s Compensation in Context newsletter reports:

Four large pension funds have asked shareholders of the drug company Mylan NV to vote against six directors, including the company’s chairman, who have been nominated for re-election at the company’s annual meeting June 22.
“We believe the time has come to hold Mylan’s board accountable for its costly record of compensation, risk and compliance failures,” said the letter to shareholders, a copy of which was filed recently with the Securities and Exchange Commission.


The letter was signed by Scott Stringer, the New York City comptroller, on behalf of the $170.6 billion New York City Retirement Systems for which he is fiduciary to the five funds within the system; Thomas DiNapoli, the New York state comptroller and sole trustee of the $192 billion New York State Common Retirement Fund, Albany; Anne Sheehan, director of corporate governance for the $206.5 billion California State Teachers’ Retirement System, West Sacramento; and Margriet Stavast-Groothuis, adviser, responsible investment, for the €205.8 billion ($230 billion) Dutch pension provider PGGM, which manages the assets of the €185 billion Pensioenfonds Zorg en Welzijn, Zeist, Netherlands.


Collectively, the pension funds own approximately 4.3 million shares of Mylan stock, worth about $170 million, said the letter to shareholders.

Paper: An Activist View of CEO Compensation

A new paper from Stanford University’s Rock Center presents a formula that improves on the “static” disclosures about CEO pay on proxies because it reveals a more important metric: variability with performance. The factors:

1. Calculate the “minimum” payout that a CEO is expected to receive in a given year. One might expect that the minimum payment a CEO receives is equal to his or her salary. Typically, however, this is not the case. A CEO will retain time-vested restricted stock without regard to performance. Furthermore, CEOs almost always receive some portion of their annual bonus. Targets are set low enough to be achievable, and a zero payout almost never occurs in practice. Most plans set a lower threshold (hurdle amount) equal to 50% of the target, and we include this figure in the minimum payout. Taking this all together, we assume the “minimum” payout to a CEO as equal to the CEO’s salary, plus restricted stock, plus 50% of the target value of the annual bonus.
2. Calculate how much incremental pay the CEO will receive if he or she achieves target-level performance. This amount equals the incremental compensation assuming the annual bonus and long-term incentive plans are paid out at the target level. (We assume no change in stock price, so that all of this incremental compensation comes from additional payments and not change in value of equity awards due to stock price change).
3. Calculate incremental pay if maximum bonuses are paid. This amount equals the incremental compensation for achieving the high end of the annual bonus and the high end of the long-term incentive plan. (Again, we assume no change in stock price).
Steps 2 and 3 highlight how much upside potential is available to the CEO for achieving performance milestones, even if shareholders see no appreciable return. They also illustrate the potential disconnect that can occur between the financial outcomes of shareholders and the CEO.
4. Add the incremental compensation the CEO will receive assuming some reasonable stock-price appreciation. We assume a 50 percent increase, although higher or lower return scenarios are equally valid. This calculation adds the incremental payout from stock options and the appreciation of restricted stock and performance shares. Treating stock-price appreciation as an independent analytical variable allows us to see how equity awards add leverage to the pay package and the degree to which CEO pay outcomes and shareholder interests are aligned.
Taken together, this framework provides a foundation for analyzing the scale and structure of CEO pay. It provides a rigorous and systematic method for evaluating critical issues, such as:
  • The degree to which pay is “guaranteed” or “at-risk”;
  • The degree to which payouts are driven by operating versus stock-price performance;
  • The sensitivity of CEO compensation to stock-price returns;
  • The importance and rigor of performance metrics;
  • The potential risk embedded in the CEO pay package.

The paper can be downloaded here.

CEOs of big companies get the biggest raises in 3 years – LA Times

The typical big-company chief executive raked in $11.5 million last year in salary, stock and other compensation, according to a study by executive data firm Equilar for the Associated Press. That’s an 8.5% raise from a year earlier, the biggest in three years.The bump reflects how well stocks have done under these CEOs’ watch. Boards of directors increasingly require that CEOs push their stock price higher to collect their maximum possible payout, and the Standard & Poor’s 500 index returned 12% last year.

Over the last five years, median CEO pay in the survey has jumped 19.6%, not accounting for inflation. That’s nearly double the 10.9% rise in the typical weekly paycheck for full-time employees across the country.

The top-paid CEO last year was Thomas Rutledge of Charter Communications Inc., at $98 million. The vast majority of that came from stock and option awards included as part of a new five-year employment agreement, and Charter’s stock will need to more than double for Rutledge to collect the full amount.

No. 2 on the compensation list last year was Leslie Moonves of CBS Corp., who earned $68.6 million.

No. 3 was Walt Disney’s Robert Iger, who made $41 million….CEO pay did fall for one group of companies last year: those where investors complained the loudest about executive pay. Compensation dropped for nine of the 10 companies scoring the lowest on “Say on Pay” votes, where shareholders give thumbs up or down on top executives’ earnings.

At Exelon, for example, the majority of voting shares were against how much executives made in 2015, particularly when the stock lost 22% that year. After the vote, Exelon made several changes, including capping how much executives can receive in incentive payments if the stock loses money over the year.

Auto supplier BorgWarner had last year’s second-lowest passing rate in the survey on “Say on Pay,” with 60% of voting shares saying no or abstaining. The company made changes to its compensation program and cut a 2016 incentive award by $2.4 million to $950,000 for CEO James Verrier. His total compensation dropped 29% to $12.3 million last year.

Source: CEOs of big companies get the biggest raises in 3 years – LA Times

Are Fund Managers Pushing Back on CEO Pay?

Financial Times notes:

[T]here are tangible signs that a growing number of investors are taking action to rein in excessive pay for company bosses. The consensus is that pressure from the public, politicians and clients have combined to put pressure on the investment industry to prove it is willing to push back on egregious pay packages.

Graeme Griffiths, a director at Principles for Responsible Investment, a UN­backed organisation whose members oversee a collective $62tn of assets, says: “Society is calling on fund managers to be more engaged. The public is now more aware of [wealth inequalities] than they were before.

“There has been a lot of academic research, news coverage and changes in the political landscape that have increased scrutiny of the differentials between those in well [paid] positions in the corporate arena versus those in more typical jobs. [Asset managers] are certainly partly responsible for this divergence over a long period of time.”

BlackRock, which was urged to toughen its voting approachurged to toughen its voting approach after approving 97 per cent of US pay resolutions in the 12 months to the end of June 2015, this year urged the CEOs of the UK’s largest companies to ensure salary increases for executives did not outpace those for average workers.

The world’s largest asset manager was also slightly less lenient on pay in the US last year, approving 96 per cent of remuneration reports in the 12 months to the end of June 2016, according to figures compiled for the FT by Proxy Insight, the data provider.

BlackRock chief executive Larry Fink additionally wroteLarry Fink additionally wrote to the heads of large global companies this year warning them that BlackRock would not “hesitate to exercise our right to vote against . . . misaligned executive compensation”.

Elizabeth Holmes owes Theranos $25 million – MarketWatch

VEA Vice Chair Nell Minow is quoted in this story about Theranos’s loan to founder Elizabeth Holmes to exercise her stock options.

“It subverts the entire premise of an option grant,” said Nell Minow, vice chair of ValueEdge Advisors, a corporate governance consulting firm, who said such grants are traditionally meant to encourage executives to produce results for their shareholders. The deal between Theranos and Ms. Holmes means “any downside is someone else’s risk,” Minow said.

Source: Elizabeth Holmes owes Theranos $25 million – MarketWatch

Ralph Lauren – CEO Pay Updates: 2017 Proxy Season

At As You Sow, Rosanna Weaver writes about pay for the eponymous Ralph Lauren:

While once common, employment agreements with excessive guarantees have grown rarer. Many shareholders vote against pay when packages are of even three years. On March 31, 2017, the board of Ralph Lauren signed an agreement with Ralph Lauren that will last for five years, through April 2, 2022. “His annual base salary will continue to be $1.75 million, and he will continue to have a target bonus opportunity in the amount of $6 million for each fiscal year.” These are extraordinarily generous guarantees, particularly given that the company also pays for a CEO.

However, the most alarming things in the agreement is what happens if Lauren – who is currently 77 years old — leaves employment for any reason, including disability. In terms of salary and bonus, the treatment is routine, though still generous. Much more problematic is treatment of unvested restricted performance share units (“RPSUs”) and PSUs which “will vest at target in their entirety on the date of his termination of employment.” Similar vesting will occur if the company fails to extend the contract after in 2022.

Source: Ralph Lauren – CEO Pay Updates: 2017 Proxy Season

Wells Fargo – CEO Pay Updates: 2017 Proxy Season

“For many years to come, Wells Fargo will be held up as an example of impacts of poorly designed incentive plans and the very real impacts of reputational damage,” Rosanna Landis Weaver says in an analysis of compansation at Wells Fargo.

Despite promises to reduce pay following last year’s revelation of fraudulent account leading to the departure of the CEO and the payment of $185 million in fines, Weaver notes,

Wells Fargo still has extraordinarily high executive compensation. The actions taken do not go far enough to restore investor trust. President and CEO Timothy Sloan’s pay package grew 17% from last year to $13 million. Sloan did not receive a bonus this year, but the value of his stock award increased from $8 million to $10.5 million. The increase is more than double the $1 million non-equity incentive compensation award he received last year.

It is true that if the company fails to meet performance criteria those performance shares may be worth less than estimated, but they may also be worth more. The footnotes on the summary compensation table note that at the 150% of target award Sloan would receive 327,444 performance shares with a current value of $15,750,056.

In addition, Sloan has a hefty salary. In March of 2016, when he was promoted to president, Sloan’s salary was increased from $2 million to $2.4 million. As we noted in our analysis then, this was not only extremely high for a president of a company but was higher than that of the vast majority of CEOs of similarly sized companies.

Source: Wells Fargo – CEO Pay Updates: 2017 Proxy Season