Say on Pay

What exactly is Shareholder Say on Pay, and why should anyone care?  My intent with this blog post is not to explore legislation.  It is intended to explore the concept of executive pay.

Many years ago – when I was much younger – a bank manager may well have earned an above-average income, compared with most other working adults.  But... not an income that would have been extraordinarily higher than, or much different to - say - the salary of a school principal, or another manager working at any mid- or large-sized company.  Employees of any corporations should be paid market-related wages, commensurate with their responsibilities, within reason.

I am sure that most people wouldn't have much of a problem with people like Bill Gates, or members of The Beatles, becoming fabulously wealthy.  They delivered product genius, user-friendly innovation, creativity and more.  They provided work-related increased productivity tools, or pleasure, by entertaining billions of people.

They should be rewarded at whatever the market is willing to pay for their products. 

And they created employment for tens of thousands of other, regular people!  Bill Gates is currently listed as the 2^nd richest man on the planet.  I am - probably much like you - totally okay with that!

But how, why and when did exorbitant executive pay become the norm for CEOs at large corporations?  For example, pharmaceutical company, Novartis, recently offered a six-year, $76MM golden parachute to outgoing Chairman Daniel Vasella.  An egregious reward?  Or, the new Chairman of UBS, Axel Weber, joined UBS for $5.3M earlier this year.

The Wall Street Journal reported that Swiss voters had overwhelmingly backed a say on pay referendum on Sunday.  The country will soon have the strictest rules in Europe on executive pay.  Compared with the high Swiss average annual income of about $73,500, payments such as those mentioned above look more than simply out of whack. 

And when Switzerland turns against high executive pay, we must know that there may be a problem.

New Swiss rules actually don't seek to limit pay.  It does ban so-called golden handshakes and parachutes.  Company owners will also need to ensure that pay is aligned with performance.  Also worth noting is that the Swiss 13.2% top income tax rate may help to prevent over-compensated executives from fleeing the country, unlike their neighbor, France!

According to Forbes, Brian Moynihan (CEO, Bank of America) earned about $8MM in 2011.  He has been a bank employee for most of his career (previously FleetBoston; acquired by Bank of America).  His management decisions and strategy has served me well, on a personal level.  As a shareholder, my investment in $BAC nearly doubled in 2012 - thank you Brian and Co.!  How much should he be paid, as the manager of a $122B corporation that employs almost 300,000 people?

And then there’s Jamie Dimon (CEO, J.P. Morgan).  According to Forbes, he earned more than $20MM in 2011.  At least his resume includes the co-founding of Citigroup in 1998.  $JPM has a market valuation of almost $200B, and the bank provides employment to almost 300,000 people. Dimon’s salary is only a small fraction of his management responsibilities.

What do you think?  Where is executive pay going?

Origin:  Originally UK company law set a default rule that the remuneration of directors was to be set by the company's general meeting (Companies Act 1862).  Over time however, more and more companies gave the right to directors (the position found in the articles for most modern companies).  Generally, the directors determine the remuneration of directors.

Kinda like the police investigating the police... hmmm?

In the U.S., say on pay proposals went through many iterations, with Dodd-Frank perhaps the most well known.

For those more academically minded, read Edward Hauder’s blog.  He is a Senior Advisor at Exequity LLP.  His blog provides current information on say on pay developments.

Disclosure: Long on $BAC