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Questioning High Approval Rates for Executive Compensation

Overwhelmingly, shareholder votes are approving executive compensation. A survey conducted by consulting firm Towers Watson found that 90% of companies said their executive pay packages received approval ratings of 71% or higher. More than half of all companies (61%) had approval ratings of 90% or higher.

The Dodd-Frank Wall Street Reform and Consumer Protection Act requires companies to hold a shareholder vote on compensation at least once every three years (www.sec.gov/news/press/2011/2011-25.htm). The votes are non-binding, meaning the companies do not have to honor shareholder requests on pay. Nonetheless, as the numbers show, few compensation plans are voted down.

There are reasons for shareholders to question whether the proposed compensation packages are in their best interest. Most companies surveyed (81%) said they defined the peer group they used to analyze executive compensation. In contrast, just 34% used a proxy adviser peer group and only 17% used an industry index. The definition of the peer group is important because slightly more than half (52%) of companies use a summary compensation table pay to perform the analysis. (The summary compensation table is required by the Securities and Exchange Commission to show what executives are earning.) In other words, compensation committees are handpicking the companies to measure pay against.

The metrics for assessing performance should also raise questions. Nearly three-quarters of companies (73%) used total shareholder return as a performance measure in the analysis. In contrast, less than a quarter considered return on equity/assets/investment/capital (23%) or net income (22%). Though generating shareholder return is important, executives should be focused on creating long-term value for shareholders, not just simply short-term returns.

Inputs for compensation remain largely in the hands of corporate insiders. Boards of shareholders and compensation committee preferences influenced decisions on compensation for 77% of companies. Advice from compensation consultants was weighed at 74% of all companies. In contrast, discussions with shareholders were only considered by 38% of all companies.

This data shows the importance of voting proxy statements and attending shareholder meetings if possible. Though good executives should arguably be rewarded well, boards of shareholders should be held responsible for acting in the best interest of shareholders.

Source: “Getting Pay for Performance Right: Executive Compensation Flash Survey Findings,” Towers Watson, October 2012.


Discussion

Donald Myers from AZ posted about 1 year ago:

I would recommend voting no on all compensation packages. It is clear that Boards have no idea how to set compensation, because so many of the board members are also on the receiving end they are all just patting each other on the back. Moreover so many executives have been given enormous stock gifts they are often a non-trivial part of those voting yes. As repeated articles in the WSJ have and continue to show, the executives run the companies in order to pad their own pockets not to benefit either the stockholders or the employees


Edwin Taylor from OH posted about 1 year ago:

there should be a distinction made in executive compensation if the executive is a founding executive as opposed to one brought in through an outside headhunter. A founder executive should benefit from growth and profit he generates no matter what the amount. A succeeding executive from the outside should start at a percentage times the average salary of the employee staff, like the Japanese.


Robert Gariepy from WI posted about 1 year ago:

If stockholders are truly the owners of the company, why don't we see more of the income passed on in the form of dividends? I would like to see a statement in summary compensation reports as to what it costs per share to fund these bloated compensation packages. Also, why is it that there never seems to be a negative side to the compensation package regardless of performance? If they fail, they still get a golden parachute.


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