‘Overpaid’ CEOs a risk for investors, study finds

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By Ross Kerber | BOSTON

BOSTON Executive pay that is disproportionate to
a company’s past performance may also signal that poor returns
are coming, according to a study released on Monday by
shareholder activist group As You Sow.

The Oakland, California, nonprofit found the average returns
for the 100 S&P 500 companies it previously identified as
having the most questionable pay went on to underperform the
index by 2.9 percentage points over a roughly two-year period
ended on Jan. 31.

As You Sow flagged as “overpaid” a number of chief executive
officers known for high compensation despite the mixed
performance of their companies’ shares over the period.

For example, Discovery Communications Inc CEO
David Zaslav received $32.4 million in 2015, according to the
company’s most recent proxy filing. During the study period, Discovery shares fell 12 percent.

Discovery representatives did not respond to requests for

Study lead author Rosanna Landis Weaver said investors could
have used the findings of a similar report from 2015 to short
the shares of companies giving their CEOs outsized rewards.
Selling shares short is bet that a company’s shares will decline
in price.

“If you have a CEO whose primary interest is increasing his
own wealth, that’s not going to be good for shareholders,”
Weaver said in an interview.

High executive pay has been controversial at a time of
rising inequality. But investors routinely approve compensation
at most large U.S. companies, with boards often saying they have
linked it to performance metrics.

As You Sow used two broad measures to judge if S&P 500 CEOs
are overpaid.

First, the group looked at factors that raised questions
about how a board set compensation, such as whether pay exceeded
that of peers.

Second, it made a financial prediction of what each CEO
might have been paid based on shareholder returns. Companies
with the most red flags and biggest gaps between their actual
and predicted compensation were judged the most overpaid.

The study also found many large fund firms often approved
pay at the 100 “most overpaid” S&P 500 companies. For instance
BlackRock, the world’s largest asset manager, opposed pay
just 7 percent of the time in the group.

BlackRock spokesman Ed Sweeney said that among the
highest-paid U.S. CEOs, BlackRock funds voted against pay and/or
against compensation committee members 20 percent of the time,
and raised pay concerns with another 38 percent of those

Pay disconnected from company performance “is a symptom of
broader governance failures,” Sweeney said.

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