From Barry Ritholz:
CEO pay is rigged.
If that sounds more like a late-night presidential tweet than a fact, let’s consider the evidence.
The compensation packages of the chief executive officers of America have been rising faster than just about any rational metric upon which they are supposedly based. “CEO pay grew an astounding 943% over the past 37 years,” according to a recent Economic Policy Institute analysis. EPI further observes this was a far faster growth rate than “the cost of living, the productivity of the economy, and the stock market.”
CEO compensation isn’t the pay for performance its advocates claim. Instead, it is unmoored from any rational basis.
We may blame corporate boards for allowing this abuse to happen, a breach of their duty of stewardship, but why isn’t more being done about it?
Those in the best position to press for changes in executive pay are the giant fund companies like BlackRock Inc. and Vanguard Group Inc….. Vanguard Chairman and CEO Bill McNabb said in an interview last fall that rather than only rely on proxy votes, the firm has been pressuring companies behind the scenes to pare back outrageous packages. That approach makes sense, given that the indexing giant, for the most part, can’t simply sell the stock of uncooperative companies without uncoupling their funds from the indexes they are trying to track.
It looks like passive investing is part of the problem. Membership of an index ensures that a stock will be supported by passive, index investors. Plus boards can use stock buy-backs to support their own stock price, giving them partial control over the major performance metric on which they are rewarded.
Only active fund managers will dig deeper and rate management on their ability to create long-term value. Unfortunately their influence over stock prices is shrinking.