The Advisors' Blog

Shareholder proponent As You Sow recently issued its 8th annual “100 Most Overpaid CEOs” report, which is available for download on their website. Here’s how they identify “overpaid” CEOs:

To identify the 100 Most Overpaid CEOs, we evaluate the CEO pay at S&P 500 companies using data provided by Institutional Shareholder Services (ISS). Further data and analysis provided by HIP Investor computes what the pay of the CEO would be, assuming such pay is related to cumulative Total Shareholder Return (TSR) over the previous five years, using a statistical regression model. This provides a formula to calculate the amount of excess pay each CEO receives. We then add data that ranks companies by what percent of company shares voted against the CEO pay package.

A newer calculation of shareholder votes by Insightia uses only the votes of institutional investors (those required to file SEC Form 13F) in both the numerator (shares voted against) and denominator (total shares voted) to calculate percentage opposition. This calculation gives a more accurate indication of institutional investors’ level of dissatisfaction, most obviously in cases where insiders own a particularly large portion of stock or there are dual class shares. More information on this and a comparison between reported votes and what we are calling “institutional votes” can be found in Appendix B. Finally, we rank companies by the ratio of the CEO’s pay to the pay of the median company employee.

The rankings of companies by excess CEO pay and by shareholder votes on CEO pay are each weighted at 40 percent. The final ranking based on CEO-to-worker pay ratio is weighted at 20 percent. The complete list of the 100 Most Overpaid CEOs using this methodology is found in Appendix A. The regression analysis of predicted and excess pay calculated by HIP Investor is found in Appendix C, and its methodology is explained further there.

Here’s an interesting nugget from page 7 about the correlation between proxy advisor recommendations and CEOs on the list:

In 2021, ISS recommended voting against 11 percent of the CEO pay packages at S&P 500 companies and against 45 percent of the 100 Most Overpaid CEOs. These percentages are based on the ISS “standard” policy. ISS also offers voting recommendations based on other policies (e.g., a Socially Responsible Investor (SRI) policy, a public pension fund policy, and a Taft-Hartley policy). Differences between the standard and SRI policy are minimal on compensation issues…

The ISS Taft-Hartley policy was designed to appeal to Labor Union pension funds. This season, the Taft-Hartley policy recommended voting against 65 percent of the 100 Most Overpaid CEO pay packages. The most significant difference between the Taft-Hartley policy and the standard policy seems to be a sentence in that policy that says votes against can be triggered when “the board has failed to demonstrate good stewardship of investors’ interests regarding executive compensation practices.” The public pension fund policy closely tracks the Taft-Hartley policy on compensation.

Glass Lewis uses a model comparing CEO pay in relation to company peers and company performance compared to peers. It awards letter grades between “A” and “F.” An “A” means that the percentile rank for compensation is significantly less than its percentile rank for company performance. In 2021, Glass Lewis recommended shareholders vote against 12.4 percent of CEO pay packages at S&P 500 companies and against 50 percent on the 100 Most Overpaid CEOs list. This is a 14 percent increase in vote against recommendations for the 100 Most Overpaid CEOs. These percentages are based on the Glass Lewis “standard” policy. Glass Lewis also offers ESG and Taft-Hartley policies. The ESG policy voted against 57 percent of the 100 Most Overpaid CEOs list and the Taft-Hartley policy voted against 52 percent.

So, if your CEO is on this list, it’s a signal that you should pay extra attention to your proxy statement communications – including how you’re justifying the pay package and disclosing the actual and potential payouts. We have a lot of resources on this site to help you with that. Check out the “Say-on-Pay Solicitation Strategies” and “Say-on-Pay Disclosure Issues” chapters of Lynn & Borges’s “Executive Compensation Disclosure Treatise”. Visit our “Determining How Much Pay is Appropriate” Practice Area for guidance on pay decisions.

– Liz Dunshee