CEO pay has reached levels hundreds of times what median workers earn — a trend unaccompanied by financial outperformance, and one that many shareholders have rejected but the biggest fund companies have supported.
Last year, average pay among CEOs at S&P 500 companies was $18.8m, an increase of nearly 21% over the $15.6m average in 2021, according to a report Thursday from As You Sow. The report, the “100 Most Overpaid CEOs,” now in its ninth edition, questions why some of the largest asset managers have failed to try to rein in executive compensation at many of their portfolio companies.
Trending in the wrong direction
“When I began looking at issues of executive compensation and inequality back in the 1970s … I was appalled that the typical CEO of large American companies was earning 60 times the compensation of the typical American worker,” former Labor Secretary Robert Reich said, speaking at a webcast about the report’s findings. Now, “the typical CEO of these big companies is not earning 60, 70, not even 100 times, but 324 times the typical worker. We are in the Twilight Zone now, folks. We are in a different type of capitalism altogether.”
That increasing ratio comes as wages for average workers have mostly remained flat over the past 40 years, adjusted for inflation, Reich said.
“Two-thirds of Americans are living paycheck to paycheck. They are not saving,” he said.
Last year, 82% of S&P 500 company CEOs got bonuses for meeting or exceeding targets, which implies that bonus packages are now mostly entitlements, said Rosanna Landis Weaver, director of wage justice and executive pay at As You Sow and one of the report’s authors.
“If 82% of advanced placement students got a 5 on the test, we would understand that test is no longer useful,” Landis Weaver said. One problem with the targets set for CEO compensation is that they often rely out outdated metrics like earnings-per-share ratios, which can be manipulated by stock repurchases, according to the report.
Among the group’s list of the most overpaid CEOs, “we have 10 companies where the [CEO-to-worker pay] ratio is more than 1,000 to one,” she said. “What they are suggesting is that 10 median employees working 100 years provide as much value to the company as the CEO did in one year … I can’t imagine a situation where that is reasonable.”
To identify the 100 companies with overpaid CEOs, As You Sow relied on a financial performance analysis by HIP Investor (Human Impact and Profit) of S&P 500 companies. It also looked at the percentage of shares voting against CEO compensation and the ratio of CEO to median-worker pay.
Votes against
Last year, an average of 12.6% of shareholders voted against CEO pay at S&P 500 companies, up by 4.2 percentage points from the level in 2017.
But that recent figure doesn’t tell the full story, as pension funds and smaller mutual fund providers have become much more likely than the biggest firms to vote against pay.
The biggest US mutual fund managers — BlackRock, Vanguard, Fidelity, State Street and JP Morgan — voted against S&P 500 CEO pay at rates of less than 10% last year. When it came to the 100 CEOs As You Sow named as the most overpaid, those providers voted against pay at a higher rate, with BlackRock at 25%, Vanguard at 26%, Fidelity at 12%, State Street at 28% and JP Morgan at 32%, according to the report.
However, some fund managers voted against CEO pay at much higher rates, led by NEI Investments at 95% against S&P 500 companies and 100% of the 100 most overpaid CEOs, Aviva Investors (88% and 99%), Trillium Asset Management (100% and 98%), Domini Impact Investments (81% and 97%) and Achmea (81% and 95%).
Among the largest asset managers, Legal & General (77% and 85%) and Amundi (71% and 79%) had the highest rates of voting against CEO pay.
One firm, HSBC, recently implemented new proxy voting guidelines and last year voted almost exclusively against CEO pay packages.
Asset managers based outside the US “can see the absurdity of US CEO pay” and tend to vote against it, Landis Weaver said. But the biggest US asset managers “are the folks with the most power, and they don’t use it particularly well. They could be controlling pay more than they are.”
Why it matters
So-called “say-on-pay” votes are nonbinding, but that does not mean they do not have an influence on how CEO compensation is set.
An example of the effectiveness of such votes is seen in the change in Chipotle CEO Brian Niccol’s compensation, according to the report. In 2020, nearly 49% of shareholders voted against his pay, which at the time totaled $38.3m. The following year, Niccol’s total compensation was reduced to $17.8m, and the company has eliminated some perks and incorporated ESG factors into the compensation package. That resulted in Chipotle seeing the most improved say-on-pay vote last year, Landis Weaver said.
Similar votes and pay reductions have also recently occurred at Hilton and Aptiv, she noted.
There is also an equity factor to consider, with a lack of diversity among the top 10 most overpaid CEOs in the report.
“All 10 are mainly white men who are over 60,” said HIP CEO Paul Herman, who was a contributor to the As You Sow report.
Over the past year, the 100 companies with the most overpaid CEOs saw average returns of -25.3%, while the wider S&P 500 saw -22.8%, Herman noted. Since 2015, there has been an average drag on performance of more than 2% annually for those 100 companies, and the figures are much bigger, at 6% annually, for the 10 companies with the most overpaid CEOs, he said.
“As an investor, you should care about this … Overpaid CEOs are an indicator of future risk,” Herman said. “It’s meaningful to your portfolio.”