Median CEO compensation at Northwest public companies rose 11 percent to $1.7 million last year. Nonetheless, experts suggest the "say on pay" law is influencing the way corporate chieftains are paid.
The parent company of Portland-based Umpqua Bank, stung by shareholders’ rejection of its executive-pay proposal, trimmed its CEO’s base salary last year by 7 percent to $815,000.
It’s rare for a company to lose a “say-on-pay” vote, and even rarer for a company to lower executive pay — Umpqua was one of only four Northwest companies whose CEO’s base salary fell in 2011.
In fact, median total CEO pay at 115 Northwest public companies was $1.7 million, according to an analysis for The Seattle Times by Equilar, which tracks executive compensation. Median total pay rose 11 percent over the previous year, the second year of double-digit growth.
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Shareholders, meanwhile, saw negative one-year returns at two-thirds of all the companies. At a third of companies, the CEO received more in total pay despite negative shareholder return.
Nonetheless, experts suggest the “say on pay” law — requiring most public companies to let shareholders cast an advisory vote on the pay plan for executives — is influencing the way corporate chieftains are paid.
“Say on pay has become a big, big deal,” said Fred Whittlesey, a Bainbridge Island compensation consultant. “It has forced companies to engage with investors … and improved attention to some truly poor pay practices.”
But like past efforts by Congress to crack down on lavish CEO pay, the new rules can spawn perverse consequences.
Companies wary of the backlash from a negative say-on-pay vote have responded by making their compensation formulas increasingly complex, and by carefully selecting — usually to the CEO’s advantage — the group of peer companies to which the executive’s pay is compared.
Joe Sorrentino, managing director of Steven Hall & Partners, a New York compensation-advisory firm, says too many companies want their CEO to be paid above the median of their peer group, which has the effect of ratcheting up executive pay all around.
“We’re not living in Lake Wobegon, where everyone is above average,” he said.
Say-on-pay is the latest in a series of mostly ineffective efforts by Congress and regulators to rein in executive pay, which has skyrocketed since the late 1980s as companies got bigger and stock options pumped up total pay.
When Congress passed the Dodd-Frank financial-industry overhaul in 2010, it mandated say-on-pay advisory votes at least once every three years for nearly all publicly traded companies.
Last year 38 large U.S. public companies failed say-on-pay votes, according to GMI Ratings, a research firm.
An additional 157 firms got less than 70 percent shareholder approval of their executive pay plans.
So far this year, shareholders have rejected executive pay plans at more than 30 companies, including Citigroup, Simon Property Group and Chiquita International, but none in the Pacific Northwest.
Ralph Walkling, executive director of the Center for Corporate Governance at Drexel University, said companies that lose a say-on-pay vote typically have a disconnect between executive pay and company performance.
“Shareholders aren’t as concerned with the level of pay,” Walkling said. “They want to know, ‘Are the CEOs delivering the performance that they’re paying for?’ “
To justify executive pay to shareholders, companies are eliminating certain perks, tying bonuses to specific corporate goals and adopting “clawback” policies to take back bonuses and stock options granted if the company has to restate its financials, said Greg Ruel, a research associate at GMI Ratings.
“These are real changes that will benefit shareholders by ensuring that executives are earning the money they receive,” he said.
At the same time, companies are using increasingly complex baskets of measurements and compensation plans to calculate executive officers’ pay.
“They’ve been encouraged to tell their story,” Whittlesey said. “They tell such a long story, nobody has time to read it.”
Instead, big investors rely on influential proxy advisory firms like Institutional Shareholder Services and Glass Lewis, which evaluate executive pay.
At Umpqua, both firms urged shareholders to reject the executive pay plan.
After losing that vote, Umpqua officials met with the proxy firms and made changes.
A key one: Executives don’t qualify for their annual stock grants if Umpqua doesn’t outperform a regional bank index, which is essentially a group of peer companies chosen by an independent group.
Asked about the changes, Umpqua said in a statement that the say-on-pay rule “allows for more dialogue with investors, which is always valuable.” But the rule also “provides less discretion for the board to structure performance metrics,” it said.
Doug Kilgore, executive director of the Worker Owner Council of Washington, which monitors the companies in which union pension funds invest, said a “relative performance” yardstick such as Umpqua’s bank index should be built into more executive pay plans.
If instead the benchmark is simply how much the company’s stock climbed, “the rewards executives receive have more to do with the movement of the market as a whole rather than any particular contribution of the executive or their team,” he said.
Washington Federal, the holding company for the state’s largest independent bank, is an example of how shareholders can endorse pay plans for companies that fall short on performance.
It was one of 11 Pacific Northwest companies — five of them in banking — where CEOs got pay raises although total shareholder return was negative and net profit declined over the year.
In Washington Federal’s case, the board raised CEO Roy Whitehead’s salary 28 percent to $712,500 and awarded a $990,000 bonus and $558,000 in stock.
In 2011, Washington Federal’s total shareholder return was negative 16 percent (although that was better than a leading bank index, which was down 23 percent over the same period).
The company said the board wanted to recognize Washington Federal’s “exemplary” performance, including a 347 percent increase in core earnings in 2011 and a decline in nonperforming assets. In addition, the company said that even after the raise, Whitehead’s pay was only 78 percent of the median for peer banks.
He turned down a merit raise in 2012, the company said. And starting in 2012, Washington Federal will use total shareholder return — the yardstick favored by the big proxy advisers — as the key metric for stock compensation.
As companies increasingly rely on comparisons to peer companies for setting a CEO’s pay, some experts say that insiders and consultants can influence the outcome by which companies they choose.
“If you have two firms similar in size and similar in industry profile, they cherry-pick the one that pays more,” said Michael Faulkender, director of the University of Maryland’s Center for Financial Policy.
“Don’t tell me you’re paying the median and then give me a biased group of competitors,” he said. “Show me the true peer group, and then if you want to pay more than the median, justify why you’re doing that.”
Company proxies don’t typically explain exactly how the peers were selected. So when changes are made, it can raise questions.
In the middle of its 2011 fiscal year, Starbucks’ compensation committee changed the company’s peer group. It dropped three firms — Whole Foods Market, Clorox, and FedEx — that had been peers for the past three years, while adding PepsiCo and Kellogg.
Both newcomers have substantially larger revenues than Starbucks — six times larger, in PepsiCo’s case. Two of the dropped companies had smaller revenues than Starbucks, and FedEx was just three times larger.
The new peer group’s median 2011 salary was 10 percent higher and median total compensation was 6 percent higher, a Seattle Times analysis shows.
Starbucks says it targets executive salary, bonus, perks, stock and options to fall “within the median range” of its peer group — so a better-paid peer group tends to move the goal posts for Starbucks executives.
A company spokesman said the primary selection criteria for peer companies are industry, size and global presence.
Generally, even if companies use proper methods to develop a peer group, they should explain changes that could appear to be cherry-picking, said Sorrentino, the compensation consultant.
“So much of this is about optics,” he said.
Shareholders overwhelmingly approved Starbucks’ pay plan this year. After all, the company had a 45 percent return last year and a 400 percent three-year return.
“Most companies are passing (say-on-pay votes) with flying colors,” said Drexel’s Walkling, the corporate-governance expert.
The pressure to keep it that way is spurring them to provide more disclosure on executive pay plans.
“Transparency is important,” Walkling said. Company boards “are working hard to make sure shareholders understand what the linkage is between pay and performance.”
Sanjay Bhatt: 206-464-3103 or email@example.com