Unjust Rewards
CEOs keep pocketing fat raises, but it may be about time to pay the piper
Of course, the inexorable rise of executive pay has other causes. Many compensation consultants feel pressure to recommend big raises to curry favor with executives who may hire them for other jobs. State and federal laws, and corporate rules, are stacked against investors, who in most cases still can't nominate their own slate of directors or require boards to obey their wishes. So, many boards are packed with the CEOs' friends. A study last year by Wharton School accountants found that about a quarter of all directors had some sort of "backdoor" social or business connection to the executives they oversee. And CEOs who have at least one such relationship with a director earned over $450,000 a year more than those with a truly independent board.
But the baby steps taken this year are creating "cautious optimism" in longtime critics like Patrick McGurn, executive vice president of Institutional Shareholder Services, which advises big institutions on corporate governance. "This is the proverbial oil tanker that takes a long time to turn," he says. "But I see some positive signs for the first time."
Behind the turnaround is the growing mobilization of disgruntled shareholders. Some of the nation's most famous investors--including T.Boone Pickens, Vanguard founder Jack Bogle, and fund manager Chris Davis--have joined a new group called Investors for Director Accountability. It is dedicated to voting out board members who give executives sweetheart deals. Founder Frederick "Shad" Rowe, who chairs Texas's public employees retirement fund, said he finally got fed up late last year when he saw some small pension funds forced to cut back benefits because of poor investment returns while executives at companies with declining stocks, such as Pfizer's McKinnell, were getting multimillion-dollar paychecks and pensions. "To Americans who work and save for retirement, this is completely absurd. They are taking shareholders' money. It is ridiculous that this one guy [McKinnell] would get a $6.5 million annual pension. That is so tone-deaf to America." Rowe's effort at unseating the Pfizer compensation committee failed, as the board convinced other investors that McKinnell should be rewarded richly for overseeing lots of research into new drugs.
But other investors have already won small victories. The union-run LongView Funds, for example, have received support from more bottom-line-oriented investors to win four annual meeting votes since last year. Their demand: that companies bring to future shareholder ballots any golden parachutes that exceed three times the executives' annual pay. These resolutions are largely symbolic, since most corporate bylaws make such resolutions only advisory. That allows boards to ignore the wishes of even a majority of shareholders.
Performance. Luckily for investors, though, even the threat of a symbolic and unsuccessful shareholder revolt is sparking some boards to take back controversial giveaways. Just a week before its annual meeting this May, the board of UnitedHealth made dramatic reforms to its compensation policies. Board members scrapped executives' equity grants, golden parachutes, free life insurance, and several other perks. And the board members cut their own compensation of stipends and stock options by 40 percent. Likewise, Pfizer's compensation committee voted to rein in future executive raises. No more will executive pay packages be aimed at the top 25 percent of their peers. From now on, Pfizer packages will be benchmarked to the middle.
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