The first in a four-part series on how CEO pay became a national controversy.
Tiny ice crystals blew sideways, stinging the January air, as the bald man with a scowl made his way from his mid-Manhattan apartment to a debate a few blocks away. Ira Kay was on a mission to defend rising executive compensation against the outrage of dissatisfied shareholders, governance activists and anyone else who might cross his path. He faced a headwind of popular resentment.
|Part 1: The Man Pushing CEO Pay to the Stratosphere|
|Part 2: How Smithfield Larded CEO's Pay Package|
|Part 3: The High-Stakes Fight Over 'Pay for Performance'|
|Part 4: An Unlikely Champion for Higher CEO Pay|
The Occupy Wall Street revolt already was in retreat that bitter morning in early 2013 but the “people-powered movement” underscored the gap between the 1 percent and everybody else in America as a new dividing line in contemporary society. In the 3-1/2 years since the economy began recovering from the worst financial crisis since the Great Depression, the wealthiest Americans had watched their incomes grow by nearly one-third while the rest nursed 0.4 percent gains, inspiring one protester in Zucotti Park to hold aloft a cardboard sign stating, “Give Class War A Chance.”
Considered by many clients and competitors to be the top CEO-compensation consultant in the business, the 63-year-old Kay — square-shouldered with small, round eyeglasses — is a managing director of New York-based Pay Governance LLC, which represents board compensation committees at one out of every 10 Standard & Poor’s 500 corporations.
Non-management directors set chief executive pay at public companies; and, in recent years, most boards hired independent consultants such as Pay Governance to guide them. In only its fourth year of existence, Kay’s firm is the second-leading compensation consultant to big-company boards, behind Frederic W. Cook & Co., founded in 1973. Unbeholden to management, Kay’s job is to incentivize without being excessive for marquee clients such as Alcoa, DirecTV, McGraw Hill Financial, Morgan Stanley and Wal-Mart Stores.
Were shareholders to envision one person to champion their interests, it might well be this son of a used-car salesman. Kay’s family struggled for money as he grew up in a lower middle-class neighborhood of Long Island. His Russian-immigrant grandfather sewed women’s dresses in a union shop for decades, and he dreamed of becoming a trade organizer, once he’d earned his Ph.D. in labor economics.
Yet Kay is an unabashed proponent of blockbuster pay for management, citing the stock market as an independent arbiter of performance, true to shareholders, boards and executives alike, he told me during the course of several interviews before the 2014 shareholder proxy season.
“One of the reasons the U.S. economy has outperformed Japan and Europe is because of our executive pay model,” Kay says. “Companies are setting reasonably challenging goals, they’re beating them and their stock prices are going up. I don’t know what else somebody would want.” He worries that take-it-to-the-street demonstrations embodied by the Occupy movement and shareholder activism empowered by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 hem in investor capital, sapping management and the stock-based awards that confer the biggest part of its earnings power. “I believe executives are going to end up substantially lower paid over the next 10 years,” he warns.
By selectively quoting the market, Kay and other executive-compensation specialists are little-known architects of pay-bracket bulge for the 1 percent. On average, Pay Governance’s S&P 500 clients pay their CEOs $1.6 million more than the companies’ median peers, an analysis of their 2012 proxy filings shows. Among the biggest payers were Walt Disney at $25 million above median; eBay $18.2 million; Viacom $17.3 million; and Time Warner $10.5 million, according to an analysis for The Fiscal Times by Columbia University researcher Mathijs de Vaan. Disney replaced Pay Governance with Cook last year.
The executives may merit superior compensation. But traditional analysis might also understate just how much more than their board-selected peers CEOs make. On average, Pay Governance’s big-company clients pay their CEOs $3 million above median, relative to 100 alternative peer groups de Vaan produced randomly for each client, based on comparable industry codes, revenues and market capitalizations. Kay, in an email, called the methodology behind the analysis "deeply flawed."
|PAYING MORE THAN PEERS|
|When boards pay CEOs above the median of the company’s self-selected peers, shareholders and corporate governance activists often want to know why. Pay Governance’s highest above-median CEOs, based on their 2012 proxies:|
|Walt Disney||$25 Million|
|Time Warner||$10.5 Million|
|Wynn Resorts||$7.4 Million|
|Source: Columbia University research|
Unregulated, under-scrutinized and with unseen board-room influence, compensation consultants typically speak softly and carry a big stick. Kay doesn’t speak softly, though. Walter Bardenwerper, the retired general counsel of compensation consultant Towers Watson, says he remembers Kay’s booming voice piercing the walls of the boardroom that belonged to their employer, Watson Wyatt & Co., as he and partners plotted taking the firm public years ago. Today, Kay appears mostly before sympathetic audiences, including rich clients, to argue that the executive compensation system, far from being broken, makes America great.
“In the 1970s, companies recruited and rewarded CEOs like bureaucrats, but with the implementation of stock options they started recruiting and rewarding CEOs like entrepreneurs,” he said at the Human Resources Policy Institute, a partnership of Boston University’s School of Management and human resources executives, in May 2007. “It is this change that has fueled economic growth.”