About kmassie

I am a Canadian lawyer currently living in London. After practicing labour and employment law in Canada, I moved to South Africa to obtain a Master's Degree in Labour Law. I recently had a book published entitled "Executive Salaries in South Africa: Who Should Have a Say on Pay," which was co-written by my colleague Debbie Collier with input from journalist Ann Crotty. In addition to working as an associate at the Institute of Development and Labour Law at the University of Cape Town, I offer consulting services for companies looking to adopt or modify all forms of employment policies, including remuneration policies.

Response to The Myth of CEO Pay and “Greed”

Earlier this month, the Mises Institute, an Austrian education institution, published an article entitled The Myth of CEO Pay and “Greed” in which the author, Matt Palumbo (@MattPalumbo12), argues that the widely touted statistic that CEOs out-earn the average worker 331:1 has been blown out of proportion. The author argues, rightly so, that this statistic (calculated by the AFL-CIO) only represents those CEOs working at S&P 500 companies while there are over 27 million private firms in the United States. In fact, when the Bureau of Labour’s 2013 statistics are used, the average CEO’s pay was $178,400. According to Mr. Palumbo, “[t]he larger sample of CEOs reported by the BLS gives us a much better understanding of “average CEO compensation.”

However, the $178,400 figure is also misleading. Why? Because the Bureau of Labour only includes certain categories of remuneration in calculating pay. The Bureau of Labour’s figures include: base rates, commission, cost-of-living allowances, guaranteed pay, incentive pay related to actual individual or group production, and production bonuses. Most importantly, they exclude stock awards, non-production bonuses and year-end bonuses, categories of pay that can reach many multiples of an executive’s salary.  The Bureau of Labour also excludes many other important elements of CEO pay, including attendance bonuses, perquisites, profit-sharing payments, relocation allowances and severance pay.

The problem anyone has when trying to calculate an overall average is that it is impossible to obtain data on what every CEO at every company is paid. Only those companies that are publicly traded have an obligation to report detailed figures on executive remuneration. Figures from the 27 million private American firms will remain just that – private, except to the extent that certain remuneration figures must be reported to the Bureau of Labour.

Beyond this, the pay of CEOs at small, privately held firms is not directly comparable to the pay of CEOs at publicly traded companies. The CEOs at many of the 27 million private American firms will also be the owners of those companies, or directly beholden to the owner. The CEOs of publicly traded companies are responsible to a board of directors and shareholders who are scattered across the country. The agency problem (shareholders are unable to adequately monitor and supervise the board and CEO who are supposed to be acting in their best interests) is much more pervasive at publicly traded companies than privately held firms. It is this problem that the 331:1 statistic highlights, and it is this problem that regulation tries to address.

Despite the fact that the 331:1 ratio is only based on pay at 350 companies in the S&P 500 index, this does not make the statistic any less accurate in depicting what it does. Pay at the largest companies in our society is out of control, and we need to take steps to rein it in. The problem is not limited to the S&P 500. Let’s look at a company in the Russell 2000 index, an index of small-cap stocks on the opposite end of the spectrum from those in the S&P 500. Since Russell 2000 companies are publicly traded, they are required to disclose detailed figures on executive remuneration. I randomly chose the company Aéropostale from the list of Russell 2000 companies. The CEO of Aéropostale took home a salary of $950,000 in 2013. Add to that, stock awards and other incentives for a total of $13.8 million. This company is not in the top 350. It is not even in the top 500. Yet there is clearly something wrong with this figure.

Mr. Palumbo makes a good point. We need to be clearer about the statistics we are using in order to avoid misleading our readers. We can all do a better job of this. However, we need more than statistics – we also need solutions.

Calma v. Templeton: Choose your peers wisely and your limits carefully

The Delaware Court of Chancery recently released judgment in Calma v Templeton, a decision that has implications for remuneration committees when selecting a company’s peer group and limits on share plan awards. In this case, a shareholder challenged an award of restricted stock units (RSUs) made to non-employee directors under Citrix Systems, Inc.’s 2005 incentive plan. The Plan, which had been approved by shareholders, allowed the board to award RSUs to directors, officers, employees, consultants and advisors. The Plan limited the remuneration committee to a maximum grant of one million shares per year per individual, valued at the time of judgment as $55 million.

In 2010, the compensation committee had granted shares and options with a fair value of $244,968 to Citrix’s non-employee directors, in addition to cash compensation for a total of between $288,718 and $312,040 per person.

In 2011, the compensation committee awarded $339,320 worth of RSUs to each non-employee director, in addition to cash that brought their total compensation to between $386,716 and $425,570. These amounts were significantly higher than the figures from 2010. Similar awards were made in 2012 and 2013, with maximum compensation reaching $662,935.

The plaintiff alleged that the RSU awards to non-employee directors between 2011 and 2013 were excessive, and constituted a breach of fiduciary duty (the duty to act in good faith and in the best interests of the company), a waste of corporate assets and unjust enrichment. The defendants moved to dismiss the plaintiff’s claims prior to trial.

The defendants argued that the claim for breach of fiduciary duty should be dismissed because the Plan had been ratified by shareholders and thus any awards under the Plan were unimpeachable. The directors were merely acting within the confines of a scheme approved by shareholders.

The Court disagreed. Although it is generally true that when shareholders approve a transaction, the transaction will be largely beyond review, it could not be said in this case that shareholder ratification of the Plan shielded every award under the Plan from scrutiny. For example, a decision to award every director the maximum amount of shares allowable under the Plan would be reviewable by the court. This is because the Plan contained no specific limits on the number of shares that could be awarded to each category of beneficiary. Rather, the one-million-share-limit applied to directors, non-employee directors, and employees alike. In approving the Plan’s general maximum limit, shareholders had not approved a certain magnitude of compensation that could be paid to non-executive directors. Non-executive directors, executive directors and employees would all have very different levels of compensation even though they could all theoretically be awarded one million RSUs each.

The court determined that it was required to review the directors’ actions in awarding shares under the Plan to determine whether the awards were entirely fair to the company, resulting from fair dealing and using a fair price. The court found a reasonable basis for conceiving that the awards to non-employee directors were not entirely fair to Citrix. The problematic transactions under the Plan had been justified by the board on the basis of similar awards being made to Citrix’s peer group, which included companies such as Amazon, Google and Microsoft. The market capitalization, revenue and net income of these three companies are completely different from Citrix. As a result, the court found it was entirely possible that RSU awards made on the basis of a comparison with these “peers” were not entirely fair. Thus, the plaintiff was permitted to continue its action for breach of fiduciary duty, as well as unjust enrichment.

This judgment should provide caution to remuneration committees: select your peer group wisely. Use companies that have similar market capitalization, revenue and net income statistics to your own. If your market cap is 12.74 billion, as Citrix’s was at the beginning of 2011, think again before comparing yourself to Microsoft, whose market cap at the time was 235 billion. Small players who consider Microsoft their peer could be exposing themselves to potential legal liability.

Additionally, remuneration committees should set detailed grant limits under share award plans. There should be a limit for each category of beneficiary entitled to an award. For example, one limit for executive directors, one for non-executive directors and a third for employees. If a company fails to set detailed limits, grants under their incentive plans may be viewed as a breach of fiduciary duty even if the plan itself has been approved by shareholders.

*Thanks to @execpaymatters for alerting me to the decision!

Pay considering employment

Remuneration reports typically include a section dealing with “pay and employment conditions within the company,” which usually contains a generic statement about how the remuneration committee considers company-wide pay scales and employment conditions (as well as employee feedback) in setting executive remuneration. Rarely is there much more detail than this.

For the 2014 financial year, HSBC CEO Stuart Gulliver took home a £1,290,000 bonus and a share award valued at £2,112,000. Following the release of its 2014 annual report, it was disclosed that HSBC is allegedly planning to lay off 10,000-20,000 people this year. Since Gulliver took over as CEO in 2011, HSBC’s employment numbers are down by 47,000.

This leads me to wonder whether the remuneration committee considered the feedback of those 47,000 people, and the 20,000 who might follow this year, in setting Gulliver’s bonus and share award. I am sure that a few of those 67,000 former employees have some choice words for Gulliver and the remuneration committee.

I am not saying in any way, shape or form that companies should not be able to restructure, lay off employees, or change direction. Companies obviously need flexibility to adjust when things are not working, costs are too high, or a different strategy is needed. Companies must have the ability to grow or shrink as the case may be.

However, the sticking point is that while executives drive home in nice cars with hefty pay cheques, a large number of employees walk out the door without a job. Not through any fault of their own, but because management decided to change direction, restructure or eliminate a function it used to think was necessary. When management decides to create and fill a position in one year, and then eliminate that position later on, it begs the question whether the decision to create the position in the first place was a sound one. As a result of poor planning, an employee has now lost a job. If the job loss is a result of technological advances, one must ask whether those employees could not have been trained to do other jobs. Rarely does a technological advance take a company by surprise – there is usually some lead up to the decision to adopt and use new technologies that may allow a company to redeploy or retrain existing employees.

I hope these types of questions are being asked by remuneration committees when they contemplate “pay and employment conditions within the company.” If not, they should be. In an ideal world, executives would be encouraged to create even more employment, something all economies need to grow. This aspiration does not necessarily align with the interests of shareholders, who would prefer to reduce costs. However, boards must balance the diverse interests of all of the company’s stakeholders in determining what is in the best interests of the corporation, and an important stakeholder is the employee. Remuneration committees should consider overall employment levels within the company, and provide an explanation for why an executive continues to receive a bonus in the face of downsizing. Especially if that downsizing is not the result of an economic downturn, but poor planning by management.

Pay should consider employment – current levels, growth, and reasons for lay-offs. Until then, let’s hear some feedback from those 47,000 and counting HSBC employees.

Are we in it for the long run?

The Financial Times published an article this weekend blaming the bonus culture for a decline in productivity and investment in the US and the UK. The theory is that because we reward managers highly for achieving short-term targets, we are incentivizing them to focus on short-term gain to the detriment of long-term growth. Managers are better rewarded for boosting profits in the short-term than they are for making decisions to reinvest in the business so that it continues to be profitable in the future.

Support for this theory can be seen from the fact (as reported by the Wall Street Journal and Keith P. Bishop at Allen Matkins) that a study has found that S&P 500 indexed companies spent a median of 36% of their operating cash flow on dividends and buybacks in 2013, up from 18% in 2003. At the same time, the proportion spent on plants and equipment decreased. Management has an incentive to boost returns to shareholders now, while under-investing in the future of the business.

This problem is compounded by the fact that we have defined the ‘long-term’ under executive incentive plans as three to five years. How many capital projects can be planned, executed and become fully operational and profitable within three years? Three years is simply not enough time to achieve the type of reinvestment needed to grow the economy.

The High Pay Centre has published a report calling for an end of the long-term incentive, arguing that it has resulted in the escalation of executive pay with no corresponding escalation in company performance. Instead, companies should only pay executives an annual cash bonus.

The danger with this approach is that if we eliminate all long-term incentives, we compound the problem of executives focusing on the short-term interests of shareholders to the detriment of the future well-being of the company. Thus, those of us who advocate for a “back to the bonus” shift must be sure that we also focus on how bonuses should be structured in order to best align management’s incentives with the company’s long-term interests. We must avoid a situation where executives are paid the right amount of money to do the wrong job. Performance metrics should include measures taken to improve the long-term profitability and productivity of the business. Additionally, the long-term should be longer than a three to five year horizon. If we are to see a real shift in how companies deploy their capital, we must start to reward the long-term investment decisions we want to see.

Indepth: the protest over Man Group’s pay

At Man Group’s May 8th annual general meeting, 42% of shareholders voted against its remuneration policy and 34% against its remuneration report, with a further 1.8% abstaining from the latter. This amounts to one of the largest remuneration-protest-votes of the season.

What sparked the ire of shareholders? Let’s take a walk through Man Group’s recent history. During the good old days circa 2007 and 2008, shareholders routinely saw share prices over 600p. Fast track to the last day of 2012 and Man Group’s shares closed at 82.75p – a mighty fall for one of the biggest listed hedge fund firms in the world. An explanation of what caused this fall can be read here.

This free fall was presided over by CEO Peter Clarke. At the height of Man Group’s performance in 2008, Clarke took home $27 million in earnings. By 2011, he was restricted to a generous $7 million package while shareholders saw their shares fall dramatically in value. Finally, in 2012, performance was so poor that there was nothing the remuneration committee could do to justify awarding Clarke a bonus or a long-term incentive. He saw his income drop to just over a meagre $1 million.

Early in 2013, Clarke stepped down. He was succeeded by Emmanuel Roman, the head of GLG, which had been taken over by Man Group in 2010. In transitioning from GLG to Man Group, it was agreed that Roman would retain his $1 million base salary even though this was higher than the salary earned by Clarke. With his contract in hand and his salary secure, Roman was tasked with turning the company’s fortunes around.

2013 was set to be a year of difficult decisions, restructuring, and lay offs. The year-end share price increased only marginally between 2012 and 2013, and some of the CEO’s performance targets were not met. While the 280-plus laid off employees were packing their desks, Roman was awarded $3,397,163 in total earnings, including a $1.75 million bonus and long-term incentives (‘LTIs’) valued at almost $600,000. Former CEO Peter Clarke took home $811,494 during his 2013 gardening leave, likely more than many of the laid off employees combined.

It is not surprising that at the 2014 annual general meeting, the advisory vote to approve the remuneration report disclosing these payments saw 31% of votes being withheld. The steady decline in Man Group’s shares, the lay offs, and the handsome rewards being earned by executives combined to cause shareholders to protest in silence by withholding their votes. At the same meeting, Man Group introduced its new 2014 remuneration policy for its first binding shareholder vote. This policy imposed a cap on bonuses and LTI awards at 250% and 350% of salary respectively, and was approved with very little complaint. Shareholders signalled their dissatisfaction with actual pay levels by withholding votes but did not actively campaign against the new remuneration policy.

By 2014, it was clear that improvements had been made at Man Group. The tough decisions made in 2013 had helped to turn the company’s fortunes around. The closing share price at the end of 2014 rebounded to over 160 pence, profits were up, the dividend increased and the company announced a share buy-back program. All of these results pleased shareholders. Following this performance, Roman was awarded $5,067,792 in remuneration, including his $1 million salary, the maximum $2.5 million cash bonus and $1.4 million in LTIs. This last payment constituted only 40% of his maximum potential LTI entitlement because 2013’s performance continued to play a part in the calculation.

As a result of the successes of 2014, the board decided that it should strike while the iron was lukewarm. Despite the fact it had just passed a remuneration policy in 2014 which would be valid for three years, it now wanted to amend this policy as being far too restrictive. This decision demonstrates either short-sightedness, or cunning evasion on the part of the board. My vote is for cunning evasion

Now that shareholders were mollified, bonuses of 250% and LTI awards of 350% of salary were no longer going to cut it. The board wanted the ability to reward executives like they had in the golden years and it saw a window of opportunity to increase the maximum potential bonus to 300% of salary and LTI to 525% of salary. All along, the board knew it would increase maximum payouts under its remuneration policy, but it also knew that such a decision would not have been possible when Man Group had been performing so poorly. Instead, it waited for the very first year of good performance to do so.

It is telling that in the Notice of AGM, the board disclosed that it had made the decision that limits placed on 2014 awards should no longer apply, stating that:

Man Group’s more restrictive incentive limit was imposed deliberately at that time as the Board wished to signal to the executive directors and provide assurance to our shareholders that it would not be awarding high levels of compensation so long as the Company’s performance remained disappointing. [emphasis added].

Evidently, bonuses of 250% of salary and LTI awards at 350% of salary do not constitute high levels of compensation. Also evident, it was a deliberate decision to impose restrictions on pay during a period of poor performance and to increase those limits once that period was over.

This proved to be a risky decision. 42% of shareholders voted against the new policy. However, Man Group’s cunning paid off because only 50% support was required for the new policy to take effect.

In response to the shareholder vote, Man Group released the following statement:

While the Board notes that there were a significant number of votes cast against Resolution 2 (approval of the new Directors’ remuneration policy) and Resolution 3 (approval of the Directors’ remuneration report), it has found that, as part of an extensive period of engagement with the Company’s major shareholders ahead of the AGM, the majority of those shareholders with whom the policy proposals were discussed were supportive….

It is clear that Man Group does not view the 42% dissent as problematic. It now has free rein to resume hefty payouts to executives without addressing the concerns of those 42%. As Tom Powdrill, another blogger, has put it, this response amounts to saying “we’ve talked to our shareholders and the ones that count agree with us..”

I would add that they are probably thinking: Now will the rest of you just go away already?

Let’s hope that three years from now, when Man Group is required to put another remuneration policy to a binding vote, Man Group shareholders do not just go away. Shareholders should use the next three years of advisory votes on the company’s remuneration policy to voice their displeasure. This will maximize the chances that Man Group will listen to the 42% the next time it develops a remuneration policy. Until then, we await the results, and payouts, of 2015.

Two strikes and you’re out

The past few weeks have been active ones at UK annual general meetings, as multiple companies’ shareholders have rebelled against their executive remuneration reports. In the past two weeks alone:

  • 16% of shareholders at RSA Insurance voted against its remuneration report;
  • 18% of shareholders at BG Group voted against the remuneration report;
  • 18% of Reckitt Benckiser shareholders voted against the remuneration report;
  • Ladbrokes saw 30% of votes cast against its remuneration report;
  • 28% voted against the remuneration report at Inmarsat, rising to rising to 35% if deliberate abstentions are included;
  • 33% of Centrica’s shareholders cast negative votes against the remuneration report;
  • 36% of shareholders at Tullett Prebon voted against the remuneration report; and
  • 42% of Man Group’s shareholders voted against its remuneration policy, and 34% against its remuneration report.

What will come of these protests? Likely not much. In its response to the 42% negative vote, Man Group stated that the majority of its shareholders were supportive of its remuneration policy. While this is in fact true, a 42% negative vote indicates that something is wrong with remuneration in the company. This outpouring of negativity should not be ignored or brushed off by the executive with flippant remarks.

What will force remuneration committees to react to these negative votes? Currently, so long as 50% of votes are in favour of the remuneration report, there is no requirement for companies to respond when a large proportion of shareholders vote against it. In recent years, Australia introduced a rule incentivizing companies to respond if 25% of votes are cast against their remuneration policies for two consecutive years. If this occurs, shareholders must vote to determine whether the entire board must stand for re-election. Known as the ‘two-strikes rule,’ this has provided motivation for boards to respond to negative criticisms of pay policies.

Perhaps if their jobs were on the line, instead of just their salaries, remuneration committees and executives would have a better response to investors when their remuneration reports receive such negative support. Until then, we must wait for reports to outright fail before we can be assured that we will see action.

Escorted out in handcuffs – the golden ones

When an executive leaves a company following the release of disappointing results or mismanagement, the payment of a golden parachute (a generous severance package) is often seen as rewarding the executive for failure, sparking the ire of shareholders and the public alike. More problematic is the practice of granting lucrative golden parachutes to executives who resign in order to accept a high-ranking appointment in the government. A recent article in the Financial Times explains how some banking executives receive generous payments upon entering into public service in the United States, payments they would not have been entitled to had they joined any other employer. For example, Jack Lew, who became head of the US Treasury in 2013, was permitted to retain all of his incentive rewards upon leaving Citigroup, a benefit which is uncommon for employees with unvested incentives. His new counsellor, Antonio Weiss, received $21 million upon leaving Lazard for his government position.

Instead of being called golden parachutes, these payments would be more aptly coined “golden handcuffs”. The phrase golden handcuffs usually refers to incentives used to tie an executive to a company and prevent them from joining a competitor. However, in this case, the handcuffs work by incentivizing the employee to leave the company for a position of influence in the government, and to then use that influence for the betterment of the company. Though no longer an employee of the company, the executive remains tied to it out of a sense of obligation and indebtedness, and may be inclined to repay the company in political favours. We must seriously question whether handcuffed civil servants are truly engaged in “public” service once they have been paid millions of dollars by their previous employers, or whether this payment ensures the civil servant’s support in the policy making process.

Even more problematic is the limited requirement to disclose these payments. Corporate governance standards only require disclosure of an individual’s remuneration if the recipient of the payment is the CEO, CFO or one of the top three earners in the company. Thus, unless the departing employee happens to be one of these individuals, or is subject to a confirmation hearing where he is directly asked about his remuneration, the public will never know whether he has been “handcuffed.”

AFL-CIO recently tabled a proposal at Citigroup’s annual general meeting which would have required Citigroup to disclose any golden parachutes paid out to employees entering government service. Unfortunately, this proposal only received 26.4% of votes in its favour. This result is not particularly surprising. Shareholders are not trustees of our democratic institutions. Most self-interested shareholders would support corporate actions that ensure a favourable political environment for their investments.

Instead, government action is needed to disallow payments to incoming government employees, or to at least require their disclosure. Companies should be prohibited from making payments to employees bound for government positions if those payments are different from what the employee would have been entitled to had he left for a position with any other company. Public servants should not be handcuffed to their former employers, and if they are, we should at least know about it.

Labour’s say on pay

The Labour Party has pledged to require companies to place worker representatives on remuneration committees if elected into government this May (a feat believed to be likely). IF Labour is elected, and IF they stick to their promises (both big “Ifs”), the UK will join a small list of countries that require boards to include employees in the decision-making process.

There has been a pervasive tendency for boards to equate the best interests of the company with the best interests of the shareholder. This view ignores the reality that companies operate in a wider sphere. Many stakeholders can be affected by a board’s decisions, including employees, suppliers, consumers and members of the general pubic. By expanding membership on remuneration committees, boards will be encouraged to consider the interests of stakeholders other than shareholders.

Remuneration policies are cloaked with language that caters to shareholders. Policies tend to incentivize executives to focus on maximizing shareholder value and total shareholder returns. Employees, however, care far more about the quantity, quality, and conditions of work than they do about the share price. Workers will tend to favour remuneration policies that incentivize executives to expand employment and improve working conditions. In considering if an executive has earned the rewards given to him, an employee might ask whether employees have been laid off or hired? Received salary increases? Been treated fairly? Worked in safe conditions?

Additionally, employees are more likely than shareholders to balk at the levels of pay being doled out to executives. Shareholders have a tendency to approve remuneration policies when the company is performing well and complain about pay only when the share price starts to fall. Employees, on the other hand, are more likely to consistently care about the fairness of an executive’s pay level, especially in comparison to pay levels for the rest of the work force. The employee representative will be able to ensure that high pay levels are addressed every year rather than only in years of poor share performance.

There is no question that Labour’s pledge to include an employee on remuneration committees will make the work of remuneration committees much harder. However, there is also no question that changes need to be made to executive remuneration policies and that this will require hard work. A voice of restraint is needed if restraint is to be achieved. Let’s hope that Labour sticks to its promise if elected this May.


Dear readers, 

Please note that I am on vacation for the next three weeks. During this period, I will only be posting when my schedule allows. I will resume regular Monday postings upon my return in mid-April. I hope to see you all back then! New posts will be publicized on Twitter and LinkedIn.

A voice on the board 

General Electric and Bank of America have both recently announced amendments to their by-laws that will allow a shareholder or group of shareholders holding 3% or more of a company’s shares for at least three years to nominate up to 20% of the board’s directors and include those nominees in the company’s proxy statement. This move should be welcomed by shareholders who will have the power to nominate allies for election to the board. By giving shareholders a say on who is nominated for election, shareholders have the ability to influence important issues of governance and corporate management that previously were out of reach.

Hopefully, shareholder nominees that are actually elected to the board will be appointed to board committees, including remuneration committees. Whether this will lead to any significant changes in remuneration policies and practices remains to be seen. However, shareholders now have the power to nominate directors who have well-established views on remuneration, among other issues.

GE and Bank of America should be applauded for this step towards greater shareholder engagement. More companies should be encouraged to follow suit. The next hurdle is for shareholders to actually use the voice they have been given in the boardroom by nominating directors who share their views.

(Note: For those interested, the Harvard Law School has an online forum that contains an excellent explanation proxy access and its pros and cons here).