AYS Report's key findings

Identifying the 100 most overpaid CEOs in the S&P 500 was the intended purpose of the As You Sow report report.  In undertaking the report the analysts focused not just on absolute dollars, but also on the practices believed to contribute to bloated compensation packages.

Of the top 25 most overpaid CEOs, 15 made the list for the second year in a row, and 10 have been on the list three years running.  The rankings are based on a statistical analysis of company financial performance using a regression to identify predicted pay, as well as an innovative index developed by AYS that considers 30 additional factors.

The companies listed in the first AYS report on overpaid CEOs have markedly underperformed the S&P 500 since that time.  Per the report, the 10 companies identified as having the most overpaid CEOs, as a group underperformed the S&P 500 index by an incredible 10.5 percentage points and actually demolished shareholder value with a negative 5.7 percent financial return.  In summary, the most overpaid CEO firms reduced shareholder value since the first report.

Many of the overpaid CEOs are insulated from shareholder votes, claims the report, suggesting that shareholder scrutiny can be an important deterrent to outrageous pay packages.  A number of the most overpaid CEOs are at companies with unequal voting structures and/or triennial votes, so shareholders did not have the opportunity to vote this year on the extraordinary packages.  While the Say-on-Pay regulations allow less frequent votes, and shareholders can decide if they can vote every one, two or three years, the vast majority of companies hold annual votes on pay.  The authors believe that the fact that the list of the top 25 overpaid CEOs includes several companies that do not hold annual votes on pay implies that such insulated companies are more willing to flaunt best practices on pay and performance.

The most overpaid CEO's represent an extraordinary misallocation of assets, posit the authors.  Their regression analysis showed 14 companies whose CEOs received at least $20 million more in 2015 than they would have garnered if their pay had been aligned with performance.

Shareholder votes on pay are said to be wide-ranging (in what way is unclear) and inconsistent, with pension funds deemed far better at exercising their fiduciary responsibilities.  The report, represented as the broadest survey of institutional voting ever done on the topic, shows that pension funds are more likely to vote against overpaid packages than mutual funds.  Using various state disclosure laws, the analysts were able to collect data from over 30 pension funds.  Per the report, the data shows some pension funds approving just 18% of these overpaid CEO packages, to others approving as many as 93% of them.

Acknowledging wide variation among entities, the report nevertheless indicates that mutual funds, on the other hand, are far more likely to approve of these overpaid CEO packages.  Of the funds with the largest change in voting patterns from last year, all of them opposed more of the pay packages than they had the prior year.  In addition to the trending votes, several funds have indicated that, at a minimum, they will be reviewing pay more closely.  Of the largest mutual funds, Dimensional Fund Advisors opposed 53% of these packages, while Blackrock opposed only 7% of them.  Some funds seem to routinely rubber stamp management pay packages, enabling the worst offenders and failing in their fiduciary duty.  TIAA-CREF, the leading retirement provider for teachers and college professors, is more likely to approve high-pay packages than almost any other institution of its size with support level of 90%.

Directors, who should be acting as stewards of shareholder interests, should be held individually responsible for overseeing egregious pay practices, urge the authors.  A number of directors serve on two or more overpaid S&P 500 compensation committees.  The report lists the companies that over-paying directors serve on, and identify individuals who serve on two or more 'overpaid' S&P 500 compensation committees.

While the report's methodology, conclusions and recommendations will be contested in some quarters of the corporate governance community, AYS formidably makes its case that an unchecked disconnect between CEO pay and company performance, as defined by shareholder returns, persists at certain companies.