One of our favorite reporters, Michael Hiltzik, writes a very important story about what the new tax bill reveals about the failures of CEO “incentive” pay.
The big news Friday on the executive compensation front is that Netflix is converting some of its “performance-based” pay for its top executives to straight salaries, thanks to the recently-passed tax bill.But people may be taking the wrong lesson from the change. On the surface, it looks like the five executives covered by the change are getting big raises thanks to the tax bill. But the reality is a bit more complicated. And what the new policy at Netflix really tells us is that the old “performance-based” executive compensation system always was a sham, anyway….[Under the Clinton-era rule that exempted “performance-based” pay (stock options) from the ceiling on deductibility companies and board comp committees became] adept at tailoring performance targets to guarantee maximum pay for top executives. The definition of “performance” became suspiciously flexible, as if corporate boards first decided how much to pay their executives, and then cobbled together performance targets to make sure they hit the mark. A great example was the pay of IBM’s chief executive, Virginia Rometty.
As we reported, in 2016, the fifth year of her tenure, IBM’s revenue declined 2% to $79.9 billion; the company turned in four more quarters of shrinking revenue, making 19 in a row; and its full-year profit was down 11% to $11.9 billion. Based on this “performance,” Rometty’s bonus rose to $4.95 million from $4.5 million — her largest bonus ever.
Source: Netflix raises executive salaries, proving that ‘performance-based’ pay always was a sham – LA Times
The Church of England, a major institutional investor, has put UK company bosses on notice that exorbitant pay deals will not be tolerated.<P><P>The Church Investors Group, which unites the Church of England and 58 related charities and organisations managing a combined £17bn, has written to the 350 biggest companies on the stock market to set out how it intends to vote at this year’s annual general meeting season.It is joining the chorus of voices expressing concern about executive pay in a year in which large numbers of companies are putting their bonus deals to a binding vote – rather than an advisory one – at their AGMs.<P><P>“We voted against two-thirds of remuneration reports that were proposed last year,” said Adam Matthews, head of engagement for the Church Commissioners – an investment fund manager that is a member of the Church Investors Group – and Church of England Pensions Board.<P><P>“We’re saying that when we see pay policies that aren’t justified we will vote against them. We want to see greater use of discretion by remuneration committees.”
Source: Church of England: we’ll vote to block excessive boardroom pay deals | Business | The Guardian
The Teamsters union called Tuesday for health-care giant McKesson to take back millions of dollars in incentive pay from chief executive John H. Hammergren, citing damage to the company’s reputation caused by its role in the opioid crisis.
In a letter, Ken Hall, general secretary and treasurer of the International Brotherhood of Teamsters, urged the company’s board of directors to use its “executive clawback policy to recover all or a significant portion of CEO Hammergren’s incentive pay” over the past year and suspend future payouts until it restructures its compensation system. He also suggested that the board investigate rescinding incentive pay for other executives.
Source: Teamsters demand McKesson CEO return millions of dollars for role in opioid crisis – The Washington Post
The controversial “pay ratio” rule has finally been approved, requiring companies to disclose the ratio between the pay for the top executives and the median employee. Company executives have argued that this number is hard to calculate and misleading. Investor groups have responded that if the company knows how many employees it has and how much it is paying them, it is not a difficult calculation, and that investors are sophisticated enough to understand the significance of the disclosures.
The Securities and Exchange Commission issued its first guidelines for calculating pay ratios that compare executive compensation to that of the company’s median employee. Companies are required to report this information in their proxy, registration and information statements, as well as annual reports for the first fiscal year beginning January 1, 2017. The rule is mandated by the Dodd-Frank law and was adopted in August 2015.
Source: SEC Unveils Executive Pay Ratio Guidelines – WSJ
VEA Vice-Chair Nell Minow is quoted in the video portion of this story.
A spate of lawsuits challenging director compensation over the last few years has prompted many companies to make serious moves to set new limits on annual compensation, equity awards and cash payments for board members.
Source: Agenda – Director Pay Lawsuits Push for Equity Limits, More Disclosure
Wells Fargo announced on Tuesday that it would claw back compensation valued at $41 million from its embattled chairman and chief executive, John G. Stumpf, as the financial consequences of the scandal over illegally created sham accounts at the bank reached the executive suite.The action represented one of the first times since the 2008 financial crisis that a chief executive has been forced to give up compensation. Many large companies have adopted clawback provisions at the urging of regulators and shareholder advocates, but boards have been hesitant to invoke them.
And it came one week after a blistering Senate hearing in which lawmakers criticized the company and its board for not holding its leaders financially accountable for the scandal.
Carrie Tolstedt, who led the Wells Fargo community banking division now engulfed in scandal, will surrender stock grants valued at about $19 million, the board said as it announced an investigation into the company’s practices.
Source: Wells Fargo to Claw Back $41 Million of Chief’s Pay Over Scandal – NYTimes.com
Wells Fargo chief executive John Stumpf will forfeit $41m (£31.5m) in bonuses as the bank tries to stem a scandal over its sales practices.The bank has launched an investigation how more than two million deposit and credit card accounts were opened without customers’ permission.The bank said Mr Stumpf would not receive a salary during the inquiry.The former head of retail operations, Carrie Tolstedt, will forfeit $19m of bonuses and left without a payoff.
The announcement comes ahead of Mr Stump’s appearance before the House Financial Services Committee, scheduled for Thursday, where he is expected to face another tough questioning similar to his appearance before the Senate Banking Committee last week.
Source: Wells Fargo chief forfeits $41m amid corruption probe – BBC News
In a lagged and dilatory but thought-provoking move in the US corporate governance and transparency landscape, SEC approved Dodd-Frank’s requirement on disclosing CEO vs. Worker Pay Gap after five years of procrastination (Congress passed the Dodd-Frank financial reform bill in July 2010. Dodd-Frank created the disclosure requirement but left the SEC to determine exactly how the rule would be implemented).“The rule, which is mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, would provide investors with information to consider when assessing CEO compensation, while providing companies with substantial flexibility in calculating the ratio.”The SEC required companies to disclose the median compensation of all its employees, excluding the CEO, and release a ratio comparing that figure to the CEO’s total pay. Companies would have to report the pay ratio starting in 2017.
Source: SEC to Companies: Come Clean on CEO vs. Worker Pay Gap
VEA Vice Chair Nell Minow is quoted in an LA Times story about Wells Fargo:
Yet it’s likely “nothing” will be done with the compensation of Tolstedt and other executives because the decision is being made by Wells Fargo, said Nell Minow, vice chair of ValueEdge Advisors, which promotes strong corporate governance.
“At the end of the day it’s still a judgment on the part of management and they’re judging themselves,” she said.
Minow said the “best bet a company has for getting some of the money back is to characterize [Tolstedt’s] departure as a firing for cause, which they have ample reason to do.”
Wells Fargo and Tolstedt declined comment.
Source: Wells Fargo scandal puts focus on ‘clawbacks’ of executive compensation – LA Times
The Wells Fargo executive who ran the division in which employees created two million unauthorized accounts — a process referred to as “sandbagging” within the company — will not face the same fate as the 5,300 people whose work she ostensibly oversaw. Instead of being fired, the so-called “sandbagger”-in-chief, Carrie Tolstedt, will walk away with $124 million in stock, options, and shares in Wells Fargo.Had the company fired Tolstedt instead of allowing her to retire, she would have been forced to forfeit at least $45 million of that windfall, and while it is still possible for Wells Fargo to recoup some of that exit pay if her actions are deemed to have hurt the company’s reputation, it is unlikely to do so.
Source: Wells Fargo “sandbagger”-in-chief in charge of phony account division received $124 million in exit pay – Salon.com