December 07, 1999
Who's Paying the Price of CEO Compensation?
With the last proposals for shareholder resolutions in the year 2000 trickling in, executive pay
looms large on the proxy horizon again.
Linda Wachner, CEO of The Warnaco Group, Inc., received a total compensation package of $78.3
million ($US) in 1998, according to recent findings by Graef Crystal, Editor of the Crystal Report
on Executive Compensation. That's over 10 times the average for large-cap companies in similar
industries: perhaps a little generous, but even more so if you consider that Wachner's company lost
$32.2 million in the same year, and stock prices performed poorly.
Wachner is only
one of the more visible CEOs who receive compensation beyond the proportions of their financial
performance. For eight years, shareholder groups have struggled with this issue, and have proposed
resolutions to study, report on, and link executive compensation to social, environmental, and
financial performance. Clearly, if Warnaco Group is any indication, they have a long way to go.
With the year 2000 proxy season only months away, most proposals for resolutions on
executive compensation have already been filed. At least 104 shareholder proposals addressed
executive pay in 1999, according to the Investor Responsibility Research Center (IRRC), an
organization providing analysis of shareholder activism for individuals and institutions.
Fifty-four of those came to a vote, but they received relatively low support, 9.9 percent, compared
to other social issues such as board diversity and equal employment. Unfazed, shareholders will
continue try to burst the CEO balloon this year with another round of resolutions.
corporations claim that they need to offer lucrative compensation packages to attract the very best
managers into their fold. But how much is enough? For Stephen Hilbert, CEO of Conseco, Inc., it was
$61 million in 1998, for Michael Dell of Dell Computer Corporation, it was $115.9 million. The
upper limit appears to be reaching for the stars.
"There is a strong cultural belief in
meritocracy--that those that have risen to the level of CEO are the real creators of value and that
they are in short supply," said Scott Klinger, co-director of Responsible Wealth. "In this age of
excess there is virtually no public debate over the question of how much is enough, or how much
incentive does one person need."
The explosion of CEO pay is largely due to the growth of
stock-based compensation, including options, restricted stock, and long-term incentive plans. For
instance, Linda Wachner’s options in 1998 had an estimated value of $58.2 million. A report
in Business Week found that S&P 500 companies alone awarded $128.5 billion in stock options during
1998, nearly twice the amount in 1996.
Stock-based compensation has inherent costs for
shareholders, because when options are exercised they dilute the earnings per share, putting a
downward pressure on stock price. Some companies try to compensate for this pressure by buying back
large numbers of their shares, but this ultimately cuts into their earnings and risks further
financial demise down the road.
But shareholders are not the only ones who pay the price
of extravagant CEO compensation. Many social investors believe that companies, and their CEOs, have
responsibilities to serve all of their stakeholders, including employees, consumers, and
communities. In the past eight years or so, shareholder resolutions have sought to link CEO
compensation with corporate environmental and social parameters, as well as financial performance.
The history of shareholder resolutions concerning executive compensation began in 1992,
according to the IRRC, when the Securities Exchange Commission (SEC) ruled that such proposals
would no longer be considered "ordinary business" issues, excludable from proxy statements. That
same year, the SEC issued new executive pay disclosure rules, requiring comprehensive
accountability in proxy statements.
Also in 1992, the SEC disqualified many shareholder
resolutions pertaining to social issues, such as diversity and discrimination. Although this ruling
was overturned last year, it led to shareholder activists proposing many resolutions that raised
social concerns under the umbrella of CEO pay.
The first company to receive an executive
pay resolution in 1992 was Procter & Gamble. The resolution asked for a review of executive
compensation and a report to shareholders, including information on linking executive compensation
to financial performance, the rationale for the high level of compensation for top officers, how
compensation can be linked to social and environmental performance, and a comparison of executive
compensation to wages of other employees in the U.S. and overseas.
In 1993, U.S. Congress
passed legislation that prohibited companies from deducting more than $1 million from the taxable
income paid to any of the top five executives, with the major exception being "performance-based"
compensation. This law set the stage for many of the shareholder resolutions linking executive
compensation to broad measures of performance since then. But these resolutions historically draw
"It is difficult for many shareholders to assess reasonable levels of
executive pay," said Klinger. "Proxy advisory services are far more reluctant to recommend support
of resolutions deemed to limit executive pay than they are other resolutions, such as those related
to diversity or the environment."
Although the record may not always show it, most
companies do espouse a link between executive pay and financial performance. Shareholder
resolutions for the year 2000 will not only continue to hold companies to that standard, but extend
the measure of performance beyond strict financial parameters to include social and environmental
ones in the interest of all stakeholders. Social-minded shareholders would do well to keep an eye
out for such resolutions within their portfolio.