Many investors believe that executive compensation is getting out of hand, but what about the CEO's that perform exceptionally well? One of the best performing bosses is New Century Financial's Robert K. Cole. During his nine year tenure, he has provided an average annualized return of 25% for his shareholders with his six year annual return approaching 36% - indicating that this number had been trending up. And what was his six year compensation? A mere $1.6 million, which pales in comparison to the large salaries we are seeing at many other companies like Apple and Wal-Mart. This below average pay and above average shareholder returns make Robert Cole one of the best performing CEOs in America.

Wal-Mart's (NYSE:WMT) problems be pushing down the company's stock at a rate of -3.4% annually but certainly not the compensation of it's top executive H. Lee Scott, which has topped $8.5 million per year. Scott is only the second CEO in Wal-Mart's history, with the first obviously being Sam Walton, and many are questioning whether or not he is the right one to lead the company. The world's largest retailer has underperformed the S&P500 for most of the decade while new initiatives such as expasions into Germany and the inclusion of higher end merchandise have failed miserably. Meanwhile, the company continues to receive a slew of angry letters from unions and lawyers looking to slow the company's rapid expansion outside of urban America and into smaller towns.

So, is Scott paid too much? Well, Wal-Mart continues to defend Scott's paycheck and his performance, pointing to the fact that last year alone sales increased $37 billion and income from continuing operations increased by $770 million. Moreover, the company claims Scott's compensation is benchmarked with the CEOs of other publicly traded U.S. retailers and large companies, adding that its boss gets paid one of the lowest salaries as a percentage of annual revenue and net income. Regardless, all of these improvements have done little for shareholder value, which is all that matters when all is said and done. Perhaps it's time for a change...

Democratic Presidential candidate and U.S. Senator Barack Obama sent a letter yesterday, May 30, to the leaders of the Senate Banking Committe requesting that his "Shareholder Vote on Executive Compensation Act" be given a hearing. Obama's proposed legislation would given shareholders of public companies a non-binding vote on executive compensation packages. Despite being only an advisory vote, advocates of the bill argue it would lead to increased transparency and awareness of CEO, and other executive, pay.

Here is the unabridged letter:


Dear Chairman Dodd and Ranking Member Shelby:

As you may know, in April, I introduced the Shareholder Vote on Executive Compensation Act of 2007 (S. 1181), which is the companion to a bill that passed the House of Representatives by a 269-134 vote.

Since introduction, Senators Harkin, Durbin, Brown, Kerry, and Levin have joined as cosponsors. The legislation was referred to your committee, and I am writing to respectfully request that you hold a hearing on the issue of executive compensation packages, and specifically, the Shareholder Vote on Executive Compensation Act.

S. 1181 would require a nonbinding shareholder vote on executive compensation packages. I believe public discussion and debate over executive compensation packages would force corporate boards to think twice before signing over millions of dollars to CEOs. Certainly, many CEOs are ably steering their firms and deserve their paychecks. But the rate at which executive pay has grown, as compared to stagnating wages among American workers, is rightfully frustrating shareholders and employees alike, especially given the lackluster performance of many of the companies paying these high salaries.

In 2005, the average CEO in the United States earned 262 times the pay of the average worker. Put another way, a CEO earned more in one workday than an average worker earned in a year. In 2005, the average CEO of a Standard & Poor’s 500 company received a 16% increase in CEO pay over 2004.

S.1181 neither caps nor limits CEO pay but merely requires that firms discuss and debate pay packages for CEOs on a case-by-case basis with their shareholders. If a board of directors disagrees with the nonbinding vote of shareholders, the board can still go forward with the pay package. But at the very least, shareholders would have had the opportunity to voice their opinions about whether the pay package is appropriate.

Thank you for your consideration and for your leadership in this area. I look forward to working with you on this and other legislation important to America’s economy.

Sincerely,

Barack Obama
United States Senator

Aflac, the $25 billion insurance company, just voluntarily implemented a shareholder ‘say on pay’ clause that will begin in 2009. Dawn Wolfe, of Boston Common Asset Management, sent such a proposal to be included in Aflac’s proxy statement; however, instead of resisting, as companies such as Verizon and Qwest have done recently, the board agreed and adopted the proposal without necessitating a shareholder vote on the matter.

This decision, the first of its kind, is seen as keeping with Aflac’s focus on being a shareholder-friendly company, and it could signal the beginning of a new trend as companies look to satisfy shareholder demands in the interest of public relations.

While most discussions of executive compensation criticize the seemingly inflated pay CEO receive compared to their performance, an article in Crain’s Detroit Business takes a rather unique approach. In it, CFO’s complain not that CEO pay has risen too much – but that their pay has not kept pace.

After the passage of the Sarbanes-Oxley Act and in the wake of many prominent corporate scandals, CFO pay rose due to increased the increased duties and responsibilities of the position; nonetheless, the gap between CEO and CFO pay has only risen in the years since.

According to the article, examining S&P 500 companies, median CFO pay fell from $2.69 million in 2004 to $2.61 million in 2006. In the same time period, CFO compensation as a percentage of CEO compensation fell from 36.1% to 32.2%. The article speculates that much of this difference can be attributed to the perceived importance of the CEO the “corporate breadwinners.”

Of course, the obvious question that is never raised is – using the logic of downstream overpayment effects – whether, despite the CFO-CEO pay gap, both positions are overpaid. Food for thought...

Qwest Communications International (NYSE:Q) shareholders rejected three proposals yesterday that would have given them a greater say in executive compensation matters. The proposals were sponsored by retirees and American Federation of State, County, and Municipal Employees Pension Plan. Shareholders voted down the proposal with 67% opposing, 20% supporting, and 14% abstaining. The telecommunications company did face a number of questions about executive pay packages, bonuses and other perks at the annual meeting, however, which should give the board some pause when considering future pay packages for its executives.

The failure of this "say for pay" plan marks a continued trend of failure within many public companies. In fact, Verizon Communication remains one of the only large companies to have adopted such a policy that would provide shareholders with a non-binding vote on executive pay packages. However, it is worth noting that many of these other packages were voted down by a narrow margin - the large amounts of dissident shareholders are likely to affect at least some changes in corporate boardrooms.

A recent study by three business professors published last fall in Organizational Science indicates that CEOs are overpaid along with those further down along with those further down the corporate ladder. Specifically, the study suggested that CEOs are concerned more the fairness of their own pay and can often exert significant influence on its fairness relative to other CEOs.

The study itself was conducted by Rutgers University professor James Wade along with Stanford University professor Timothy Pollock. Their work surveyed over 120 companies between 1981 and 1985 (despite the age of the data, both professors contend that current data would yield similar conclusions). The results suggested that if a CEO was overpaid by 64%, another executive one rung down the ladder would be overpaid by 26%, and those four levels down would be overpaid 12%. While these results may be questionable in nature due to the date of the data, it does indicate at least a tendency towards executives being overpaid relative to eachother.

Supposedly outrageous CEO compensation has been a popular target of media reports and political maneuvering recently. Though many executives receive pay in a year that is well beyond what many people will earn in a lifetime, the argument about CEO compensation is not whether it is high – it is whether this high pay is something “bad” or “unfair.”

In a free-market system, a worker’s pay represents their value to the company and the scarcity of similar workers in the marketplace. In theory, this means every workers’ pay, whether a janitor our a Fortune 500 executive, represents an exact measure of how much they contribute to the company and how hard they would be replace if they quit.

Using this logic, Steve Jobs’ $646 million payday for 2006 is proportional to the value he added to Apple Inc. (NDAQ:AAPL) – if his pay was too high shareholders would not tolerate it, and if it was too low Jobs would quit.

In other words, in a truly free market economy, the very existence of high executive compensation means it is justified. Food for thought in a sea of arguments claiming CEO pay is out-of-control.