Volume 20, No. 7


S&P 500 Executive Pay: Bigger Than...Whatever You Think It is - (Originally Issued May 23, 2011):  It’s the time of year for proxy deliveries and shareholder meetings - and plenty of rhetoric about CEO pay. This  year, the“say on pay” proxy vote, and the separate vote on the frequency of future say on pay votes, have added something to the mix for pay-watchers. Shareholder choices alone won’t bring any direct action on pay, however. If directors fail to heed shareholder displeasure through their say on compensation, the directors themselves might become liable through the courts. While that could certainly bring about change, it’s a process that could take years to produce any real differences in the size of executive compensation awards.

Shareholders might say “no” on pay awards more often, if they stopped focusing on only the CEO and studied all of the executive pay information available to them. The proxy statement discloses the compensation of the top five officers; even though that’s only a smattering of the total executive pay, it’s uncommon for investors to look at that cost in its totality. The top five officers are part of a CEO’s cadre of trusted executives; they’re at least a part of the total management team that breathes life into the shareholders’ collective assets. Consider them to be a major input into the production of shareholder returns, with a real cost, just like raw materials or any other purchased services. One difference: managers try to keep other production costs low - but for their own costs, they’ll employ swarms of consultants to justify higher pay.

If investors thought more about the price tag on their managers - especially in comparison to the cost of other inputs of production - they might vote “nay on pay” every chance they get. In 2010, executive pay for just the top officers recovered strongly as the financial crisis faded into the rear view mirror. Here, some perspectives on just how big the total executive pay package has become in relation to other costs that produce income and shareholder returns.

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