If Shareholders Say ‘Enough Already,’ the Board May Listen
April 6, 2013
RAISES may be hard-won for
most American workers these days, but for those fortunate few in the
executive suite, the pay increases just keep on coming. Last year, the
median chief executive at a United States company with more than $5
billion in revenue received about $14 million, 2.8 percent more than in
2011, according to an annual pay analysis conducted by Equilar. The 2012
increase, though relatively modest, still represents a raise for most of
those who inhabit the corner office (and whose companies had filed the
data by the end of March).
A more important question may
be this: Do this year’s figures show any evidence of progress toward a new
pay paradigm? You know, where the gap between the compensation of
executives and workers narrows, or where company directors put
shareholders’ interests before those of the hired hands?
After looking over the
numbers, I asked some experts in the compensation arena if they’d seen any
promising shifts toward greater fairness in
“The more things change, the
more they stay the same,” said Brian T. Foley, an independent compensation
consultant in White Plains.
Still, there were some
encouraging signs. Some outliers, like Alan R. Mulally of Ford Motor and
James P. Gorman of Morgan Stanley, took pay cuts in 2012 because their
company’s performance declined. That’s the way it’s supposed to be.
And there are some cases
where shareholders are actually reining in executive pay. Consider the
work of some 128,000
Verizon shareholders who are also retirees of the company.
Known as the
Association of BellTel Retirees, this group, for the last 15 years,
has achieved a series of corporate governance and executive compensation
changes at the company. This year, the association won a partial victory
in a battle over performance-based stock awards. The company, according to
its proxy statement, agreed to reduce such awards to senior executives
when Verizon shares underperformed, a change the retirees had urged.
The retirees have also
proposed that Verizon shareholders approve any severance package that
exceeds 2.99 times an executive’s base salary plus incentives. This
proposal will be voted on at the company’s annual meeting on May 2.
There is movement elsewhere,
too. James F. Reda, an independent compensation consultant in New York,
said he was noticing a shift among boards to award lower compensation to
incoming chief executives, especially if they are from inside the company.
“When new C.E.O.’s are hired, in a lot of cases, they are getting
below-median total-compensation packages, with the idea that higher pay
will get phased in over time,” Mr. Reda said. “New hires are not coming up
to the C.E.O. level of pay right away as they did in the past. Now boards
are making sure that they work out.”
Mr. Reda’s point brings up
what compensation experts say may be the most formidable roadblock to
fairer pay practices: longstanding chief executives who prefer the status
quo and who hold sway over their directors.
Jon F. Hanson joined the
board of HealthSouth in late 2002, just before a long-running accounting
fraud at the company came to light. He has been its chairman since 2005
through a turnover of the company’s top management and board. “When a new
C.E.O. comes in,” he said, “it emboldens the compensation committees to
look at the methods we are using to compensate our C.E.O.”
In a vote last year, 98.8
percent of HealthSouth shareholders supported its pay practices; the
compensation of its C.E.O. Jay F. Grinney stayed essentially flat last
year, even though the company turned in solid gains in the period.
“It’s the hardest to
introduce a new form of compensation when you have a long-entrenched
C.E.O.,” Mr. Hanson said.
There are plenty of those
around, of course. And that may explain why a pay practice that has
contributed mightily to ever-rising compensation — the use of the
corporate peer group — remains intact at most companies.
Using peer groups to
determine executive pay was supposed to ground it in reality, basing it on
the practices of similar companies. Instead, such benchmarking created a
kind of arms race in pay.
One problem is that the
makeup of the peer group is easily manipulated. For example, if a
medium-size company uses much larger and more complex businesses as its
benchmark, its compensation can be skewed, sending it far higher than it
“Peer-group data is, as
always, part art, part science,” said Mr. Foley, the compensation
“It can be very constructive if done well, but can also be heavily
A decade ago, directors at
the New York Stock Exchange awarded Richard A. Grasso, its chief executive
at the time, $140 million in compensation. He was compared against a peer
group made up of companies with median revenue more than 25 times that of
the exchange and median assets 125 times its own.
A furor erupted back then,
but the reliance on peer groups goes on. A compelling
paper on the problems with peer groups was published last fall by
Charles M. Elson, director of the
L. Weinberg Center for Corporate Governance at the University of
Delaware, and Craig K. Ferrere, a fellow there. In it, the authors argue
that corporate directors should eliminate peer groups and instead “develop
internally consistent standards of pay based on the individual nature of
the organization concerned, its particular competitive environment and its
Investor groups have embraced
this argument against benchmarking, said
Yale D. Tauber, the director of programs on executive compensation at
Conference Board Inc. “There is a growing dissatisfaction with where
benchmarking takes us,” he said.
BUT effecting change in the
boardroom on pay matters is a glacial process.
“When you have a new idea
that is different from the status quo, there’s always some resistance to
it,” explained Mr. Hanson, the HealthSouth chairman. “The dialogue is in
the early stages, but at least people are discussing management’s
compensation and benchmarking it against how they are performing and how
the shareholders are doing. Management is beginning to realize that it’s
not just about their compensation. We also have to make sure that the
shareholders benefit. That’s the change I’m seeing.”
Let’s hope these discussions
turn into action sooner than later.
A version of this article appeared in print on April 7, 2013, on page BU1
of the New York edition with the headline: As Shareholders Say ‘Enough
Already,’ Some Boards Are Starting to Listen.
© 2013 The New York Times Company