Investors Get Stung
Twice by Executives’ Lavish Pay Packages
frustrating fact of life for many
mutual fund investors: Even if
they’re distressed by outsize
executive compensation at public
companies whose shares they indirectly own, chances are good that the
votes cast by their investment managers actually encourage delusional
In recent years, as executive pay has climbed, fund managers have
continued voicing their approval for stratospheric compensation
packages. The failure by these fiduciaries to use their power to rein
in pay has led some critics to contend that the managers aren’t
viewing the packages in the context of what they cost company
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undeniable that pay arrangements are a shareholder expense, and
sometimes a significant one. Last year, despite a slight decline from
the median pay package for chief
executives at 200 large United States companies was almost $20
compared with those companies’ earnings or revenue, $20 million may
not sound like much. But looking at pay another way, said David J.
Winters, chief executive at
Wintergreen Advisers, a money
management firm in Mountain Lakes, N.J., brings a clearer picture of
the costs that these lush packages mean for shareholders.
suggested by Mr. Winters focuses on the stock awards given to top corporate
executives every year, and the two kinds of costs they impose on shareholders.
Stock grants are a substantial piece of the pay puzzle: Last year, they
accounted for $8.7 million of the $20 million median C.E.O. package, according
Equilar, a compensation analysis firm in
Redwood City, Calif.
Cost No. 1 is the
dilution for existing shareholders that results from these grants. As a company
issues shares, it reduces the value of existing stockholders’ stakes.
A second cost to
consider, Mr. Winters said, is the money companies pay to repurchase their
shares in trying to offset that dilutive effect on other stockholders’ stakes.
“We realized that
dilution was systemic in the Standard & Poor’s 500,” Mr. Winters said in an
interview, “and that buybacks were being used not necessarily to benefit the
shareholder but to offset the dilution from executive compensation. We call it a
look-through cost that companies charge to their shareholders. It is an expense
that is effectively hidden.”
Mr. Winters and
his colleague Liz Cohernour, Wintergreen’s chief operating officer, totaled the
compensation stock grants dispensed by S.&P. 500 companies and added to those
figures the share repurchases made by the companies to reduce the dilution
associated with the grants.
What they found:
The average annual dilution among S.&P. 500 companies relating to executive pay
was 2.5 percent of a company’s shares outstanding. Meanwhile, the costs of
buying back shares to reduce that dilution equaled an average 1.6 percent of the
outstanding shares. Added together, the shareholder costs of executive pay in
the S.&P. 500 represented 4.1 percent of each company’s shares outstanding.
Of course, these
numbers are far greater at certain companies. The 15 companies with the highest
combination of dilution and buybacks had an average of 10.2 percent of their
“It’s not only
today’s expense,” Mr. Winters said. “It’s that the costs of dilution over time
have been going up, so you have a snowballing effect.”
Advisers has been critical of executive pay for some time. Two years ago, the
firm led the charge against executive pay at Coca-Cola,
arguing that the stock awards given to Muhtar Kent, the company’s chairman and
C.E.O., were excessively dilutive to existing shareholders’ stakes. Last year,
the company reduced Mr. Kent’s grants by almost half.
And yet, though
Mr. Kent’s total pay fell by 42 percent in 2015, with a package of $14.6
million, he is not headed for the poorhouse.
Not all companies
give executives loads of stock grants. Mr. Winters provided four examples with
far less dilution related to compensation plans than is typical in the S.&P.
500. Only one is in that index: the Altria Group, the
tobacco company, with 0.7 percent average annual dilution.
The three other
companies are European: British American Tobacco, with zero dilution; Nestlé,
with 0.1 percent, and the Swatch Group, with 0.6 percent.
contended that the circular arrangement of stock grants and buybacks was
especially costly at companies in the S.&P. 500. One reason, he said, is that
many of the large money management firms offering index funds and
exchange-traded funds do not generally vote against pay packages at the
companies whose shares they own on behalf of their clients.
year’s votes by BlackRock and State Street, two major providers of index funds
and exchange-traded funds. According to
Proxy Insight, as of June, BlackRock and
State Street voted to support the pay at 95 percent of S.&P. 500 companies. This
parallels data from previous years.
companies don’t take a more aggressive stance on pay issues is something of a
mystery. Some critics speculate that it may be because their own executive pay
is high, or that they don’t want to alienate corporate clients, whose money they
manage, by voting against their pay.
When asked about
their votes in support of lavish pay, money managers often contend that when
they see problems with a company’s compensation, they talk privately with its
board to try to effect change.
For example, Anne
Elizabeth McNally, a spokeswoman for State Street, which has $415 billion under
management in a wide array of E.T.F.s, said it used
a screening process to identify companies
whose pay practices were problematic.
It engages with
these companies, and if they don’t take action, State Street will vote against
their compensation, Ms. McNally said. Last year, she said, State Street voted
against pay practices at almost half the 1,424 companies it had selected for
But this kind of
engagement process is slow, frustrating investors who are eager for a quicker
pace of change in pay plans.
erosion of their wealth that lush executive compensation can mean for investors
might just light a fire under more money managers. And to this end, Ms.
Cohernour, the Wintergreen C.O.O., suggested that the Securities and Exchange
Commission help by requiring companies to include in their annual proxy
statements both the dilution that their executive stock grants represent and the
cost of the buybacks conducted to offset it.
easily make this information clear in their proxy materials instead of making
investors dig through documents for it,” Ms. Cohernour said. “These are
significant factors for an investor to know.”
A version of this article appears in print on July 10, 2016, on page
BU1 of the New York edition with the headline: Stung Twice by Lavish
Pay at the Top.
© 2016 The
New York Times Company