Volume 26, No. 9

The proxy season has come and gone, along with shareholder “say on pays” and votes on executive compensation package amendments - which are usually requests for investors to cede more of their ownership to the top five executives and other managers. The say on pays draw attention every year, and seem dramatic - but they’re only symbolic, and therefore toothless. The rubber hits the road when shareholders stop ceding their equity ownership to managers. Period.  

The compensation plans for the top five executives have reached the point where they dented 2016 pretax income by 1.4% for the S&P 500 - even more for some sectors, less for others. The equity-based compensation is the largest single component of the pay packages awarded to the top executives - at least in the S&P 500. If shareholders would stop bleeding themselves to death with the thousands of equity paper cuts resulting from approval of equity-based compensation plans, they would be rewarding themselves. It’s a cost cut that shareholders can initiate for themselves - and it’s one that you certainly shouldn’t expect managers to initiate.  

Paradoxically, investors don’t seem to vote in their best interests when it comes to equity-based compensation plans. They’re all too willing to vote with management. Part of the problem is that the U.S. disclosure system is poorly designed for providing investors with balanced, useful information about all human capital employed in a firm, but investors can still do a better job of evaluating the effects of the top five officers’ pay packages.

There’s nothing on the horizon that will improve the human capital information package - only the Dodd-Frank “pay ratio rule,” which supplies very little useful information to investors. It seems designed more to embarrass top executives, but so far, they’ve proven to be shameless when it comes to accepting compensation. This report reviews several ways investors can challenge their own thinking about executive pay packages before voting next year’s proxies.

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