Are Shareholders Getting What We’re Paying For?

When the New York Times recently reported the results of a study on executive compensation conducted on its behalf by Equilar (the Redwood, Calif.-based executive research firm), pandering pundits and politicians slammed the findings that indicated compensation is once again on the rise.

Yet rising executive compensation is actually a good thing for shareholders, in many (but not all) instances.

The gains of 2010 followed two years that saw executive compensation receding in the wake of the 2008-09 recession. A preliminary examination of executive pay in 2010, based on data available as of April 1, found that the paychecks for top American executives were growing again, after shrinking during the 2008-9 recession.

Specifically, as reported in the Times Sunday Business section:

“The final figures show that the median pay for top executives at 200 big companies last year was $10.8 million. That works out to a 23 percent gain from 2009. The earlier study had put the median pay at a none-too-shabby $9.6 million, up 12 percent.”

“Total C.E.O. pay hasn’t quite returned to its heady, prerecession levels — but it certainly seems headed there. Despite the soft economy, weak home prices and persistently high unemployment, some top executives are already making more than they were before the economy soured.”

The Times goes on to attribute the increases mainly to the return of cash bonuses, as opposed to stock options, which jumped by 38 percent.

Why Rising Comp Can Be Good

Wall Street and Main Street will never agree on the subject of executive compensation. With unemployment surpassing 9 percent, many Americans struggling to survive will never agree with the fact Philippe P. Dauman, the chief executive of Viacom, who topped the list, made $84.5 million in 2010.

Yet, for the shareholder, an increase in executive compensation should herald improved performance for the company and (hopefully) a rise in the share price.

As the Times reported: “Granted, many American corporations did well last year. Profits were up substantially. As a result, many companies are sharing the wealth, at least with their executives.”

Qualified, seasoned executives that possess the industry acumen, leadership, and numerous other attributes required to move a company forward do not come cheap. To recruit and retain the very best talent requires parity in compensation among the upper echelon of management in the sector.

The sums may seem outrageous to most, but they are necessary for attracting and keeping the best executives.

Therefore, the shareholder needs to focus not solely on the compensation package, but on the return on that investment. The unemployment rate, the overall market’s performance, and many other barometers mean little compared to the company’s individual performance.

Furthermore, performance is also relative to the market’s current conditions. Even in times of economic uncertainty when a company does not perform well, a steady hand at the helm can ensure an anemic performance does not spiral down into a disaster.

The key is ascertaining how much of the company’s performance can be attributed to its leadership, or in spite of their actions.

The Board and Its Balancing Act

While corporate boards are increasingly sensitive to public perception, they are limited in their ability to apply such compensation structures that link plans directly to performance.

Meanwhile, even though shareholders were granted the ability to voice concerns on compensation under federal guidelines enacted in 2010, as the Times reported:

“…their votes are nonbinding. In other words, boards can still do as they please. Pay specialists say companies are taking a hard look at these votes. Still, only about 1.5 percent of the 200 companies in the Equilar study were rebuffed by their shareholders on pay. A vast majority of the votes passed overwhelmingly, with 80 percent or 90 percent support, according to Mr. Boyd of Equilar.”

As a result, boards are making more of an effort to explain the merits of pay packages, while mechanisms such as “tax gross-ups,” where the company provides a tax payment for a perquisite, such as corporate travel.

Sure, corporate boards have the power to curb spending on executive pay packages. And surely certain elements in the shareholder base of many companies will call for lowering the expense, no matter what.

Still, at a point when it appears executive comp may climb even higher for 2011, it remains to be seen, or even if, shareholders should seek to rein in comp plans.

Ultimately, if you are getting what you over-paid for, should it matter what they make on Main Street?

How to Find Out What Your CEO Makes

As a responsible shareholder activist, should the CEO of the company you invested in receive a substantial compensation plan you question, you must first do your research.

Find out exactly what the plan entailed for that company, as well as for its competitors. Then crunch the numbers of performance, track down what analysts are saying, and survey some of your fellow shareholders.

There are various web sites that can help you get started. For instance, the AFL-CIO runs an Executive Paywatch site.

To contact Craig McGuire directly, please email Craig.McGuire@TheShareholderActivist.com.