Companies with overpaid CEOs underperform, shareholder advocacy group says

Dive Brief:

2021 marked a large increase in CEO pay package rejections by shareholders, according to a report by As You Sow, a shareholder advocacy nonprofit. Last year, 16 companies saw their CEO pay packages rejected by more than half of shareholders, up from 10 in 2020 and seven in 2019.
The organization found that CEO compensation does not typically correlate with past stock return performance and that, instead, companies with the 100 most overpaid CEOs underperformed the equal-weighted average S&P 500 company for each of As You Sow's annual reports going back to 2015.
The report ranked those 100 CEOs using a formula based on indicators including pay compared to organizational performance, CEO to worker pay ratio and the percentage of institutional shareholders who voted against a pay package. CEOs from Paycom, Norwegian Cruise Line, General Electric, T-Mobile and Nike held the top five spots on As You Sow's list.

Dive Insight:

Executive compensation has become a contentious topic among members of the public, in part due to the wide gaps between CEOs and the average worker at a given company.

Last year, a study by job search website Lensa revealed a 2,202% wage difference between the average CEO of a large U.S. company and the average worker at such a company. In dollars, that equated to more than $1.2 million annually. Other entities, including the Economic Policy Institute, have found that this gap widened since the 1970s.

Organizations instituted pay increases on a broad scale in late 2021 and early 2022, including for workers below the executive and managerial levels. But recent fears regarding inflation have caused financial departments to pump the brakes on future increases.

More recent increases in executive compensation also may be reflective of a candidate-friendly hiring market that favors leadership candidates. In January, data analytics and consulting firm GlobalData said it found a 35% increase in the number of job listings for roles such as CEO, CHRO and CFO in 2021 compared to 2020.

That shareholders are increasingly rejecting pay package proposals may be reflective of frustration with how executives are compensated relative to company performance, particularly during the pandemic, according to the As You Sow report.

"Some boards acted as if pay for performance didn't matter when COVID-19 was involved, and shareholders angrily rejected those packages," Rosanna Landis Weaver, executive compensation program manager at As You Sow, said. "But it is time for more shareholders to vote against the quantum of pay, not just particular bad practices. The growth in CEO pay is unjustified and not in the best interests of shareholders."