The NYT published a pair of pieces on executive compensation. One looked at the amount (a 9% increase in the median) and the other looked at the metrics used to determine the amount. Other articles have suggested that companies use a wide variety of metrics that rely on "unconventional earnings measures."
The analysis of the amounts was nothing new. Compensation routinely climbs in good and bad years (although 2008 was an exception). With a 26.5% increase in stock prices last year, it was a surprise only that compensation grew by a more modest 9% (of course average wage increases for other workers was around 3%).
What is new, is that the analysis takes place in a "say on pay" era when compensation is given a more public examination. Shareholders have generally pushed for compensation to be determined on the basis of clear standards based primarily on performance. The new era, therefore, provides an opportunity to assess whether "say on pay" has wrought any significant changes to compensation.
The articles demonstrate a few things that were predictable but are now apparent. Experience in other countries indicated that "say on pay" would not put downward pressure on the amount of compensation, but instead would affect the method of calculation. That has occurred. It is clear that for the most part companies base compensation on performance metrics, with total shareholder return and earnings per share commonly employed. The emphasis on performance has not, as the 9% median increase illustrates, put downward pressure on total amount.
One effect, however, may have been the compression of total compensation. The NYT articles indicated that the most highly paid CEO in 2013 was at Oracle. Oracle used a non-GAAP method to assess performance and has been subjected to a negative say on pay vote two years running. Thus, while it is at the top of the list, the compensation package is viewed with considerable disfavor by shareholders.
The second highest (and this is only for CEOs in companies that had filed proxy statements in time for the study) was Bob Iger at Disney, with a total compensation at $34.3 million. Here is where it gets interesting. If you go back to 2007, during the pre-say on pay era, the highest paid CEO made more than the Oracle CEO. Moreover, the top 10 highest paid CEOs included eight individuals who received total compensation of more than $40 million. For a list, go here.
So say on pay may, therefore, be reducing the number of outliers and compressing compensation. Most likely the amounts are more consistent with a company's peer group. In any event, it seems clear that boards are less likely to have their CEO compensation stick out in a way that makes it an example of corporate excess. Problems with compensation remain and the median amounts are climbing, but a significant reduction in the number of extreme outliers is nonetheless a beneficial change wrought by say on pay.