How much does the average CEO of a major U.S. company make?
The Rock Center for Corporate Governance at Stanford University asked that question, more or less, as part of a recent survey designed to gauge public perception of pay levels for top execs. The median response of the 1,202 people surveyed was $1 million — a nice round number that probably sounded like a lot of money.
The real answer is about 10 times higher: $10.3 million, according to a 2015 report from the compensation trackers at Equilar.
Even with that vast underestimation of CEO pay, public frustration over lavish executive pay packages is clear — and not just at Bernie Sanders rallies. Roughly three-quarters of those surveyed for the Stanford study said CEOs are not “paid the correct amount relative to the average worker,” and that view held across political party affiliations. Just a quarter of Republicans believe CEOs are paid appropriately, only slightly higher than the 16 percent of Democrats and 11 percent of independents.
“There is a clear sense among the American public that CEOs are taking home much more in compensation than they deserve,” David F. Larcker, a professor at the Stanford Graduate School of Business, said in the report. “While we find that members of the public are not particularly knowledgeable about how much CEOs actually make in annual pay, there is a general sense of outrage fueled in part by the political environment.”
The outrage may only be amplified by a new report on “The 100 Most Overpaid CEOs” released today by As You Sow, an Oakland, California-based nonprofit that advocates for corporate social responsibility. If the public is frustrated by the thought of CEOs earning $1 million, as the Stanford survey suggests, what about a chief executive who makes $156 million, as David Zaslav of Discovery Communications did in 2014? Or even $42 million, which is what a foundering Yahoo paid CEO Marissa Mayer for 2014 — even after docking her more than $13 million for the company’s continued struggles.
The real problem isn’t just lofty dollar figures. As Rosanna Landis Weaver, the lead author of the As You Sow report, details, the more nettlesome issue is the fundamental disconnect between CEO pay and performance: “CEO pay grew an astounding 997 percent over the past 36 years, greatly outpacing the growth in the cost of living, the productivity of the economy, and the stock market, disproving the claim that the growth in CEO pay reflects the ‘performance’ of the company, the value of its stock, or the ability of the CEO to do anything but disproportionately raise the amount of his pay,” Weaver writes.
A regression analysis conducted by HIP Investor, which rates investments by factoring in environmental, social and governance factors, found 17 CEOs who made at least $20 million more in 2014 than they would have if their pay had been tied to performance. Based on HIP Investor’s calculations, Zaslav, the Discovery Communications chief, made $142 million more than would have been warranted if his pay was more directly linked to performance.
In a proxy filing in April 2015, Discovery said that Zaslav has done “an outstanding job” leading the company and that his new contract, which was awarded in 2014 and extends through 2019, included a large one-time stock award that vests over six years in order to “drive immediate shareholder alignment” and encourage the CEO to hold shares long-term. “This contract rewards Mr. Zaslav for the value he has created and the continued strategic direction he provides and requires sustained performance over time for that award to have value,” the filing said.
Zaslav tops As You Sow’s full list of 100 most overpaid CEOs, which was compiled using the regression analysis combined with data across more than 30 other categories, including five-year total shareholder return to how an executive’s pay compared with that of peers at similar companies. You can see the list at As You Sow, or click here to find the 25 most overpaid CEOs.
“CEOs have a difficult job and make decisions daily that could impact millions of lives and should be reasonably rewarded for the productive contributions they make to the economy and society,” Weaver writes. “However, as shown in this report, by every pay-performance measure, many CEOs are being paid entirely too much and that means the process which determines CEO pay is broken.”
The good news, as Weaver sees it, is that excessive CEO pay can be reined in before it spirals even higher — and that shareholders now have better tools in place to allow them to voice their displeasure over what top executives make, including so-called "say on pay” shareholder votes enacted by the Dodd-Frank financial reform.
“After five years of delay the SEC finally adopted rules that will allow shareholders to better understand the gap between the pay of the CEO and other employees of the corporation. It is also moving forward on rules that will help expose the gap between the pay of the CEO and the performance of the companies’ shares in the stock market,” the new report notes. “Furthermore, some mutual funds and pension funds began to better exercise their fiduciary responsibility by more frequently voting down some of the most outrageous CEO pay packages.”
But corporate board members and institutional investors are still not focusing closely enough on tying pay to performance and doing what’s best for shareholders, including those who own stock through mutual funds or pension plans, the report argues. It cites Calamos, Steward, TCW, Wadell & Reed, BlackRock, Vanguard, Primecap Odyssey, TIAA-CREF, Harbor and Hartford as the 10 mutual fund families most likely to “rubber stamp” excessive CEO pay packages.
“The pay packages analyzed in this report belong to the CEOs of companies that the majority of retirement funds are invested in,” Weaver writes. “Today, those casting the votes on the behalf of shareholders frequently do not represent the shareholders’ interests.”
Changing that may not be easy. Nell Minow, a highly regarded expert on corporate governance, says she hopes the report highlighting overpaid CEOs will serve as a guide to investors, prodding them to move money to managers who push back on pay issues. But, as with so much else in this election year, progress starts with recognizing the importance of every vote.
Update: This article was updated on Feb. 18, 2016.