As the 2016 proxy season evolves, perhaps some will tell you that their cries were heard. But, were they?
I predict that reported (in proxies) CEO compensation for 2015 generally will be down from 2014. There are several reasons that you don't hear in the campaign ads, notably:
- Pension discount rates have risen
- Equity markets generally did not perform well
What does all that have to do with CEO compensation?
People who recall my tirade last year know that many CEOs, especially those who run large companies and do have very high compensation have a defined benefit (DB) SERP as part of their compensation package. And, when discount rates fall as they did during 2014, SERP liability generally increases and that increase is considered by the SEC to be part of executive compensation. Similarly, when discount rates rise, SERP liability generally decreases meaning that the contribution of many SERPs to reported DB compensation for 2015 will be 0 (you're not permitted to report a negative number). When pay ratio reporting finally kicks in, this may be a really big deal.
What does the performance of equity markets have to do with CEO compensation? Again, most large public company CEOs receive sizable chunks of their compensation in stock whether that be in options, restricted stock, or some other form of stock compensation. When the value of that stock decreases, so does the value of that piece of their compensation.
This leads to an interesting question with an obvious answer. Did the economic conditions in 2014 that resulted in extremely large reported CEO compensation meant that CEOs were overpaid in 2014 compared to other years. And, similarly, were those same CEOs underpaid in 2015 compared to 2014?
The answer to both questions is of course not. For most of these people, their pay packages were extremely similar in 2015 to what they were in 2014 and similarly in 2013. It's not that often that we see radical changes in the way that a particular CEO is paid.
But, these external factors drive the numbers and those numbers often drive the conversation.
The final pay ratio rules won't be effective for about 2 years. Of course, companies are being encouraged to disclose earlier and some will. Perhaps this is the proxy season to start. Perhaps this is just the proxy season to understand how volatile it will be.