When CEO pay at major corporations tops 300 times that of average workers, it hurts investors, workers and the economy. For years economists have raised concerns about the growing pay disparities, and shareholders of the Wall Street giant Citigroup struck back last week in a way that is sure to get attention. A group of institutional investors, including Florida's State Board of Administration, rejected the proposed pay packages for the company's five top executives. This is the first time investors in a large financial institution made it clear that they have had enough of paying executives a fortune for underwhelming performance.
Florida's SBA used its 6.4 million shares of Citigroup to help reject the $15 million pay package for CEO Vikram Pandit, along with generous pay for other top executives. The SBA manages nearly $160 billion in investments for the state's pension fund and other interests. Mike McCauley, a senior officer at the SBA, said the reason for the rejection was "multi-dimensional" but it was largely due to "the disconnect between pay and performance." He said the plan offered executives a "big spike in total compensation" while the stock price was flat or negative. Last year, the SBA voted against one in four corporate board-supported executive compensation proposals because the pay packages didn't align with investor interests. "Say on pay" is a new tool for investor protection that should be used aggressively to fight the excesses of executive pay.
Since last year, all publicly traded companies are required to hold a nonbinding shareholder vote on top executive compensation as part of the Dodd-Frank financial reform law. In the debut proxy season of "say on pay," the mechanism didn't do much. Shareholders voted down only 2 percent of compensation plans. But Citigroup's example may spur more investor revolts. McCauley said other financial firms are seeing lackluster performance met with demands for higher pay. Considering the financial crisis of 2008 was caused by Wall Street's excess greed and reckless risk-taking, it is shameless that executives still demand seven- and eight-figure paydays.
CEO pay among S&P 500 firms grew an average of 22.8 percent in 2010 and another nearly 14 percent in 2011. Who else is enjoying double-digit increases in this stressed economy? When such rich rewards go to a cluster of executives at the top, investors lose out in a host of ways, most directly by redirecting revenues away from shareholders. Bringing CEO pay more in line with what average workers make — in 1960 the disparity was only 40 to 1 — would be better for business and investors.