We have analyzed how the largest investors in S&P 500 companies, namely mutual funds, ETFs, and public pension funds, have voted their shares on the issue of CEO pay. This enables us to see which funds are exercising their fiduciary responsibility and which are acquiescing to management in squandering company resources.
The most common reason cited to vote against pay packages is that they are not strongly connected to performance, but disclosure failures and other issues also factor heavily. Here is some specific language — collected from guidelines or disclosure on particular votes — that illustrates reasons for opposition. All of these are explanations for why a fund may, or may already have, voted against pay packages.
Pay disconnected from performance; excessive potential pay; peer issues. Funds have policies that vote against:
CEO pay plans that have no absolute limit on the amount of some or all of various bonus payments;
CEO pay plans that have discretionary payments;
Some or all of CEO pay awards vest automatically as time passes instead requiring the meeting of some performance requirement at each vesting point;
Any performance requirement that allows vesting when performance is below the median of peers;
Any payment in the form of stock options.
Failure of adequate disclosure:
The short-term incentive program or long-term incentive program thresholds and maximums are not sufficiently disclosed;
No identifiable limit for each of the different components within the policy.
Insufficient long-term emphasis and risk mitigation practices:
Long-term incentive plans with performance cycles shorter than 3 years;
The absence of clawbacks of variable remuneration;