{"id":3027,"date":"2013-03-21T15:27:52","date_gmt":"2013-03-21T23:27:52","guid":{"rendered":"http:\/\/hodakvalue.com\/blog\/?p=3027"},"modified":"2013-07-30T10:23:04","modified_gmt":"2013-07-30T18:23:04","slug":"its-proxy-season","status":"publish","type":"post","link":"http:\/\/hodakvalue.com\/blog\/its-proxy-season\/","title":{"rendered":"It’s proxy season"},"content":{"rendered":"

And that means a new flood of stories about CEO pay.\u00a0 In the past, the stories have almost uniformly been of the “can you believe…” variety.\u00a0 Can you believe that CEO whose company stock dropped 20 percent still earned $5 million?\u00a0 Can you believe that CEO who was canned got $20 million on the way out the door?\u00a0 So, I was surprised to finally see an example of intrepid journalism entitled “Pay for Performance’ No Longer a Punchline<\/a>.”\u00a0 Apparently the relationship between pay and performance is improving.<\/p>\n

The shift in how CEOs are paid highlights the growing role of investors in shaping executive compensation\u2014and their push to align pay more closely with corporate results.<\/em><\/p><\/blockquote>\n

While a welcome the change in tone, I think that both the shift to improved alignment and the role of growing investor involvement are overstated.\u00a0 To see why, consider two items about CEO pay that are approximately true:<\/p>\n

1)\u00a0 The typical large company CEO is worth about $10 million to $20 million per year.\u00a0 You may not like or agree with this sum, but try to buy one for less.<\/p>\n

2)\u00a0 Nobody expects a CEO’s pay package to be totally fixed or totally variable.\u00a0 They expect a fixed component, e.g., salary, and variable component, e.g., bonus.<\/p>\n

If you accept these two items, then you can probably accept a CEO pay structure of, say, $5 million in salary, and $10 million in target variable compensation.\u00a0 However, this poses two problems.\u00a0 The first is that tax law makes a $5 million salary unnecessarily expensive because of the envy tax<\/a> on every dollar of “non-performance based” compensation over $1 million.\u00a0 The envy tax is placed entirely on the shareholders, in the form on non-deductibility of that pay from corporate expenses.\u00a0 A good board would not want their shareholders to suffer from the envy tax, so they award $4 million of that salary in a slightly more acceptable form, e.g., as restricted stock.\u00a0 Stock awards avoid the envy tax.<\/p>\n

So, if the board’s sense that $5 million of a CEO’s pay is to be fixed is implemented as a combination of cash and time-vested stock, then one can see how it is possible that a CEO in a bad year can still earn $5 million, and it not be a failure of alignment.\u00a0 In fact, if a CEO falls short on his performance goals, and gets a $2 million bonus instead of his target bonus award of $10 million, then it might still not be a failure of alignment, although you might read, “can you believe this guy’s company did poorly, and he still got $7 million, including a $2 million bonus?”\u00a0 When his company does very well, and the CEO earns his full $10 million bonus twice over, then we see what appears to be better alignment, and we have to begin attributing that better alignment to some cause, like newly empowered shareholders.<\/p>\n

All this is not to say that shareholders are not empowered, or that this empowerment has had no effect.\u00a0 In fact, Say on Pay is definitely empowering shareholders, and it is having a significant effect on pay structures.\u00a0 But this effect is not necessarily salutary.\u00a0 In order for Say on Pay to work to the benefit of investors, two conditions must be met:\u00a0 (1) the shareholders should be able to distinguish good compensation plans from bad plans, and (2) shareholder votes should be based on that distinction.<\/p>\n

The truth is that shareholders’ can, at best, distinguish truly awful plans, the kinds of plans that have been gradually disappearing from view since long before Say on Pay.\u00a0 The other truth is that many of the shareholders that vote against company pay plans do so for reasons that might be only a tangentially related to pay.\u00a0 A union pension plan may not like that the CEO was paid a bonus in a year that the company laid off a bunch of people, even if those layoffs cut millions out of the company’s cost structure in a value-added way.\u00a0 While more companies are having dialogues with their shareholders, and such dialogues are probably a good thing for reasons that go beyond pay, there is no evidence that companies are getting useful suggestions about pay from their investors.\u00a0 That is not a knock on the investors or the companies–they have different jobs.<\/p>\n

I understand that if you’re going to write a story about pay, you have to have something beyond “Pay went up with performance” and “Investors have an indeterminate effect on pay.”\u00a0 At least, the WSJ story was not reporting, “Performance and pay are way up.\u00a0 Some of these numbers are obscene.<\/a>“<\/p>\n","protected":false},"excerpt":{"rendered":"

And that means a new flood of stories about CEO pay.\u00a0 In the past, the stories have almost uniformly been of the “can you believe…” variety.\u00a0 Can you believe that CEO whose company stock dropped 20 percent still earned $5 million?\u00a0 Can you believe that CEO who was canned got $20 million on the way […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[5,27,25],"tags":[],"class_list":["post-3027","post","type-post","status-publish","format-standard","hentry","category-executive-compensation","category-governance","category-reporting-on-pay"],"_links":{"self":[{"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/posts\/3027","targetHints":{"allow":["GET"]}}],"collection":[{"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/comments?post=3027"}],"version-history":[{"count":6,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/posts\/3027\/revisions"}],"predecessor-version":[{"id":3030,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/posts\/3027\/revisions\/3030"}],"wp:attachment":[{"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/media?parent=3027"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/categories?post=3027"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/tags?post=3027"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}