Attacking CEOs! Shining a light on boards’ shortcomings as independent overseers! Girding for proxy battles! To do those kinds of things, activists often focus on executive compensation. Pay has become even more important in the years since the financial crisis, which underscored how poorly thought-out incentive structures can motivate bad behavior.
Shareholder votes on executive compensation have focused the attention of some of the world’s largest institutional shareholders on the link between pay and company performance. That’s opened an additional avenue for activists to shore up support for their proposals, says Steven Balet, a managing director and activism expert at FTI Consulting Inc. “Activists don’t necessarily have an issue with the quantity of pay, which makes sense coming from a hedge fund that charges 2 and 20,” Balet says, referring to the standard 2 percent of assets and 20 percent of profits that funds typically collect. Instead, he says, they view pay as “a means of driving behavior.”
Consider the campaign by New York-based hedge fund Starboard Value LP against Darden Restaurants Inc. In late 2013, Starboard disclosed it had acquired a 5.6 percent stake in Darden, the ¬operator of the Olive Garden and Red Lobster restaurant chains. The next year the activist investor came out with a 294-page presentation, which famously said that Darden had stopped salting pasta water to get an extended warranty on its cooking pots.
Starboard also argued that Darden’s incentive structure had fueled bad decisions by executives. Because it focused on total sales and net earnings per share, management had tried to expand the business regardless of cost, the hedge fund said. And after the board suddenly shifted compensation targets to link some awards to same-restaurant sales growth, Darden five months later moved to sell off Red Lobster, a poor performer under that metric. According to Starboard, the pay program “encouraged excessive spending as the answer to every problem,” regardless of whether it would create or destroy value.
The activist’s pitch was persuasive. In October 2014, Darden’s shareholders voted to oust the entire slate of incumbent directors and handed the reins to Starboard Chief Executive Officer Jeffrey Smith and his handpicked team. The new board sped up improvements to the pay program that Darden had begun after Starboard disclosed its stake. They linked bonuses to adjusted per-share earnings and same-restaurant sales. And they changed long-term awards to pay out mainly in shares tied to return on invested capital and stock return relative to a group of about 50 other restaurant companies. They also cut stock-option grants.
Gene Lee, who stepped into the CEO role after the vote, was awarded $5.8 million for his first year, according to the Bloomberg Pay Index. Since then his pay has risen to $10 million; Darden’s shares returned 150 percent through Jan. 23, more than double the gain of the S&P 500 for the same period.
You can get the details on executive pay on the Bloomberg terminal. Head to {PAY } to see who the highest-paid public company executives are in the U.S. based on awarded pay, which values equity at each company’s fiscal yearend. Click on the ¬Analysis tab for a new enhancement that lets you review pay details for more than 1,000 U.S. CEOs. The Performance vs Non-¬Performance Pay enables you to see which executives have the greatest percentage of their compensation tied to company results. The Performance Metrics Matrix and the Performance & Vesting Periods tabs let you explore what overarching goals awards are tied to, their time frames, and when executives will be able to pocket the pay. You can also narrow your queries to a specific industry to compare the compensation plans with their peers’.
Taking that a step further, you can run searches on the Equity Screening (EQS) function using the new pay metrics or data on say-on-pay, which refers to shareholders’ right to vote on management remuneration. To see Russell 1000 companies with the lowest support on pay, for example, go to {EQS }. In the Add Criteria field, enter RIY and click on the Russell 1000 Index match. Next, enter Say on Pay, click on the Say on Pay Support Level item, and press . Click on the See Results | WATC button for a list of companies in the benchmark that you can sort by the percentage of shareholders supporting management on pay.
That kind of search may help you spot the next target. Pay will remain an important metric in activist campaigns, according to Balet. “They use it to show that a board is beholden to management,” he says. “And it’s effective because it’s a direct way to attack a CEO.”