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Institutional investors accused of not doing enough to curb excessive US CEO pay

Leading mutual funds and pension funds so far have taken little action to curb the pay of chief executives (CEOs) in the US according to a report by As You Sow, a non-profit organisation that promotes environmental and social corporate responsibility through shareholder advocacy.

The report identifies the S&P 500 CEOs which its believes are the 100 most overpaid – to do this the authors “focused not just on absolute dollars but also on those practices we believe to have contributed to bloated compensation packages”. Analysis has then be made of how shareholders have voted on executive pay packages in the advisory vote investors have at company annual meetings.

As You Sow’s analysis found that David Zaslav of Discovery Communications, Leslie Moonves of CBS, Steve Ells and Marty Moran of Chipotle Mexican Grill, Satya Nadella of Microsoft, and Jeffrey Leiden of Vertex Pharmaceuticals were among the most overpaid CEOs in America. Of the top 25 most overpaid CEOs in the As You Sow list, 11 were there for the second year in a row.

The most overpaid CEOs represent an extraordinary misallocation of assets, according to As You Sow. Its regression analysis showed 17 CEOs with pay at least $20 million more in 2014 than they would have garnered if their pay had been aligned with performance. For example, Discovery (owner of Discovery Channel, Animal Planet, and the Oprah Winfrey Network) paid their CEO $156 million. If existing pay packages bore a simple linear relationship to performance, that pay would have been roughly $14 million, according to As You Sow – resulting in $142 million in excess pay.

The report found that mutual funds were more likely than pension funds to support the management and vote in favour of executive pay packages. Of the largest mutual funds, American and Schwab approved 65% of these packages, while Blackrock supported 97% of them. As You Sow believes that in seemingly to rubber stamp excessive pay packages these institutional investors are failing in their fiduciary duty. One of the pension funds which changed its voting pattern the most was CalPERS, which in 2014  opposed 30% of the overpaid CEO pay packages but in 2015 increased that opposition level to 47% of the overpaid CEO pay packages, an increase of more than 50 percent its opposition.

Lead report author Rosanna Landis Weaver of As You Sow, said: “The 100 most overpaid CEOs deserve more scrutiny than they are getting today from mutual funds and pension funds. As You Sow believes that now is the time for shareholders, particularly those with fiduciary responsibilities, to become more engaged in their analysis of executive pay and those who award these packages.”

The report concludes: “CEO compensation as it is currently structured does not work: Rather than incentivise sustainable growth it increases disproportionately by every measure, and receives no consequences. Too often it rewards deals above development and risk rather than return on invested capital  The Economic Policy Institute notes that over the period of 1978 to 2013, the inflation-adjusted pay of a typical worker grew by about 0.4 percent a year (a total of 10% over 35 years) while the pay of a typical CEO grew almost a hundred-fold. CEO pay grew an astounding 997% over the past 36 years, greatly outpacing the S&P 500, which has grown only 504% in this time period.”

What do you think?