Shareholders’ Say on CEO Pay: A Resounding ‘Yeah!’

The images from that fateful autumn are permanently etched in Thomas Minder’s memory, repeating themselves in a silent movie loop. Leading off the cerebral cinematograph are grounded Swissair jets, sitting eerily empty on runways like long-abandoned haunted houses. Next come vignettes of stranded passengers and dumbfounded television viewers; then finally, montages of stressed airline executives trying desperately (but unsuccessfully) to rescue the failing air carrier.

And so it goes, ad infinitum. Rewind and repeat.

One particular snapshot, however, still irks Minder nearly a dozen years after Swissair went bankrupt: that of CEO Mario Corti, the skilled linguist and commercial pilot who negotiated a SFr. 12 million ($7.5 million) advance to assume control of the debt-ridden airline and received a 2001 salary of SFr. 22.4 million ($13.4 million) despite his botched attempts to keep the company aloft. “It was nearly the grounding of Switzerland, not only of Swissair,” Minder said of the carrier’s premature demise.

Indeed, the airline’s insolvency was a big blow to Swiss pride, but it was a bigger setback for Minder himself, a rookie CEO at the time. Barely two years after taking over the family business (Minder’s grandfather Quidort purchased beauty product manufacturer Trybol Ltd. in 1913), the Neuhausen-based company faced its own mortality as Swissair—or Corti, as Minder bitterly contends—reneged on a $530,000 supply contract for herbal toothpaste, mouthwash and other sundries for its in-flight travel kits.

Lufthansa honored the deal after assuming control of the troubled Swissair, saving Trybol from an untimely end and sparing Minder a humiliating fall from grace. He had passed his first real test as CEO, but the young entrepreneur sensed none of the exhilaration that ordinarily accompanies such victories. All Minder felt was a slow boil, a rage so focused and intense that it consumed his very existence. Rather than learn from the experience, Minder allowed the Swissair debacle—and his rage—to define him, transforming his life’s mission from simple mercantilism to a crusade against exorbitant executive salaries.

Using Corti as inspiration, Minder first vented his outrage to newspapers before officially declaring war. His first target was former UBS AG Chairman Marcel Ospel; during a shareholders’ meeting in February 2008, Minder stormed the podium as Ospel addressed the crowd, scolding him and his cohorts for losing $50 billion during the subprime mortgage meltdown. “Gentlemen, you are responsible for the biggest write-downs in Swiss corporate history,” Minder shouted before he was forcibly led away by Ospel’s bodyguards. “Put an end to the Americanization of UBS corporate philosophy!”

Minder had gone to the meeting with good intentions, hoping to give the offenders a copy of Swiss company law, which codifies corporate temperance. The law, though, never made it to its intended targets (it was tossed from the meeting along with Minder) but Ospel, for one, wouldn’t have had much use for the gift anyway—five weeks after Minder’s botched delivery, the embattled CEO
resigned from UBS amid revelations of additional losses.

In Minder’s eyes, Ospel’s fate was justification for helping infect the Swiss business elite with a high-pay culture. “He was working for Merrill Lynch in New York [City]—Wall Street—and there is where the music was playing,” Minder told Reuters magazine earlier this year. “[Big bonuses] came over, and now [they’re] not only in the financial industry, they’re also in productive industry, pharma…There’s a lot of bullshit coming from America. There’s no sustainable feeling of how managers lead a company. It shouldn’t be for the money, it shouldn’t be for personal gain—it should be for the customer.”

That sense of customer responsibility and contempt for the get-rich-quick mentality permeating much of corporate America prompted Minder to draft a self-named referendum that imposes some of the world’s tightest controls on executive compensation. It took him five years to bring the issue to a public vote as Swiss lawmakers haggled over proposals and tried to convince the anti-establishment champion—elected to parliament in 2011—to end his campaign, dubbed the “Rip-Off” or “Fat Cat” initiative by national media.

Minder, however, never backed down (he’s a third-generation alpha male, after all), and despite strong opposition from the business elite, his initiative was approved by 68 percent of Swiss voters on March 3. The new measure, which takes effect in 2015, forces all listed (Swiss) companies to hold binding votes on compensation for both managers and directors. It also bans golden handshakes and parachutes as well as bonuses to managers whose companies are acquired, and it requires all firms to disclose their pension funds’ vote. Violators of the law face steep fines and a maximum six-year prison term.

Though it applies to less than 1 percent of the country’s businesses, the Minder Initiative is one of the more far-reaching proposals in Europe. Roughly half a dozen countries have introduced or currently are drafting similar measures for binding shareholder votes on executive pay, including Belgium, Denmark, the Netherlands, Norway, Sweden and the United Kingdom. Australian, German and American shareholders, on the other hand, only have an advisory say in compensation matters.

Nevertheless, such non-binding ballots can be influential. Over the last three years, say-on-pay (SOP) votes have induced performance-based compensation in Britain and investor lawsuits in the United States. “Say-on-pay votes do have an impact,” Justin Fox, editorial director of the Harvard Business Review Group, wrote in a May 30 blog. “The question is, what kind of impact?”

Apparently, very little. Federal judges in Delaware, Illinois and Ohio have dismissed shareholders’ lawsuits, ruling that SOP votes are non-binding and cannot “overrule” the board’s judgment on executive salaries.

Moreover, SOP opposition is rare. Analysts note that investor input—most of it positive—has not helped stem the tide of rising CEO stipends as much as financial reformists had hoped it would. “It has not been a revolution,” admits Columbia Business School professor Fabrizio Ferri. “…Levels of compensation keep increasing every year, and shareholders have not—except in a very few cases—pushed back.”

This year, stakeholders hardly pushed back at all: Only two S&P 500 companies (Big Lots Inc. and Boston Properties Inc.) and 32 smaller firms failed to receive investors’ support for their top-level payrolls, according to data from Compensation Advisory Partners, a New York, N.Y.-based independent executive compensation consulting firm. Results have remained consistent over the last three years, with most companies receiving at least a 90 percent shareholder approval and 2-3 percent failing.

Last year, 97 percent of S&P 500 companies that conducted SOP votes received a majority of investors’ consent, Compensation Advisory Partners statistics show. Three-quarters of the firms garnered more than 85 percent of stakeholder support and half achieved more than 94 percent approval.

Such overwhelming ratification of CEO pay has led to considerable increases in total compensation since the Dodd-Frank Wall Street Reform and Consumer Protection Act took effect in 2011. The salaries for 321 S&P 500 executives climbed 6.5 percent last year to $9.7 million, and performance-based equity jumped 8 percent, according to a 2013 CEO pay study conducted by Equilar Inc., an executive compensation data firm headquartered in Redwood City, Calif.

“In its third year of mandatory implementation, Say on Pay has not produced the widespread indictment on pay that many thought it would,”  Equilar’s report states. “Interestingly, pay levels continue to go up for top executives. The change is not as dramatic as it was several years ago but CEO compensation is growing at levels last seen prior to the recession.”

And that growth is benefiting healthcare executives more than any other professional. Industry bigwigs received $11.1 million in total median compensation last year, a 2.7 percent increase compared with the $10.8 million they earned in 2011 and 6.7 percent more than they received in 2010, Equilar figures illustrate.

They also earn significantly more money than even the highest-paid medical professionals. Data from the U.S. Department of Labor Statistics indicate that healthcare CEOs gross 163 times more than registered nurses, 66 times more than pediatricians, 48 times more than surgeons and 61 times more than family/general practitioners. The wage gap is considerably wider for the average American worker, who would need to toil for 627 years to accrue the salary Medtronic Inc.’s first-time CEO Omar Ishrak made in just 12 months.

To be fair, though the average worker doesn’t have as demanding a job as healthcare CEOs. They are not subject to bad press or class-action lawsuits over defective goods, nor are they tasked with reducing corporate debt or navigating the changes in the Affordable Care Act. And, unless they are directly involved in manufacturing or the product approval process (both of which require special skills and training), the average worker is not burdened with reimbursement issues, clinical trial requirements or a 2.3 percent medical device tax.

Such logic was the likely catalyst driving double- and triple-digit pay hikes last year at Baxter International, BD (Becton Dickinson and Company), Johnson & Johnson (JNJ), GE and Stryker Corp. Alex Gorsky, who assumed the reins of JNJ from longtime CEO William Weldon last spring, received $10.9 million in total compensation, a 61.7 percent increase over his 2011 income. He raked in a base salary of $1.1 million, $2.8 million in stock awards, $1.5 million in options and $3.4 million in non-equity incentives. Plus, JNJ tacked on roughly $2.1 million to his pension.

In return, the retired U.S. Army captain helped turn the company’s devices and diagnostics businesses into its most profitable segments, outpacing the pharmaceutical division by more than $2 billion in combined 2012 revenue. Driving much of that growth was JNJ’s $21.3 billion purchase of Synthes Inc., which closed last June and contributed to a 34.3 percent jump in orthopedic proceeds. Gorsky, however, has been unable to stop the bombardment of recalls and lawsuits over JNJ’s all-metal hips and vaginal meshes. In March, a jury in Atlantic City, N.J., ordered the company to pay $7.76 million in punitive damages to a South Dakota nurse who claimed she was harmed by the company’s now-recalled Prolift vaginal mesh. It was the first case among 1,800 currently pending in the Garden State against JNJ and its subsidiary, Ethicon.

Kevin A. Lobo faced a similar litany of trials and tribulations upon his ascension to Stryker’s throne last fall: recalls of the Rejuvenate and ABG II modular-neck hip stems as well as the Neptune chest fluid pump device and some all-metal hip systems; disappointing third-quarter sales; layoffs associated with the device tax; and mounting hip-related implant lawsuits that eventually could cost the Warsaw, Ind.-based manufacturing behemoth up to $390 million.

Undeterred by the challenges, Lobo immediately launched a multi-faceted battle plan to reclaim growth. In his first few months as CEO, the JNJ recruit worked tirelessly to expand the company’s global footprint, orchestrating a $764 million all-cash deal for Chinese trauma and spinal product maker Trauson Holdings Co. Ltd. For his efforts, Lobo received a $9.2 million compensation package that included a $585,417 base salary, a $79,971 bonus, more than $5.9 million in stock and nearly $1.8 million in option awards. Quite a generous deal, considering Lobo earned one-quarter of that total ($2.3 million) heading Stryker Orthopedics, but his salary still didn’t match the $11.5 million given to former CEO Stephen P. MacMillan for working only two months of the year (he abruptly resigned over a reported dalliance with a corporate jet flight attendant).

During the recession, Lobo’s 300 percent pay hike and MacMillan’s lavish sendoff would have spawned a shareholder mutiny akin to the HMS Bounty revolt. But pent-up populist outrage over corporate excess and executive impudence has forced companies to revamp their compensation formulas, aligning pay more closely to performance. Hospira Inc., for example, cut its top executive’s pay by 29 percent last year after manufacturing and quality control issues stymied growth (yet the firm still rewarded two new hires with signing bonuses and two executives with double-digit percentage raises).

The same fate awaits Gorsky and Zimmer Holdings Inc. CEO David Dvorak if their empires begin to crumble—both men’s salaries are directly linked to long-term company performance, including sales, earnings per share and total stakeholder return. Zimmer also extended its overall performance evaluation period by two years.

“Boards are taking more time to get this right,” Charlie Tharp, CEO of the Center on Executive Compensation, a corporate advocacy group, told The Huffington Post.

Though executive pay formulas vary by company, most boards now are rewarding their top brass with more stock and fewer cash bonuses and options. JNJ, for instance, increased Gorsky’s equity shares last year by 314 percent, while Lobo’s stock award jumped more than 10 fold to $5.9 million, according to U.S. Securities and Exchange Commission filings. Likewise, NuVasive Inc. Chairman and CEO Alexis V. Lukianov’s 2012 stock options more than quadrupled, swelling to $4.08 million from $887,324 in 2011. Ishrak, however, was the top stakeholder last year, receiving a mind-blowing $19 million in stock (compensation, most likely, for the bevy of incentives he gave up to leave GE Healthcare).

Cash bonuses were almost non-existent among most major medical device manufacturers in 2012, with only Lobo, Ishrak and General Electric Chairman and CEO Jeffrey R. Immelt receiving such incentives.

“In general, there’s more rigor and more hurdles associated with delivering high pay than there was three or five years ago,” noted Todd Lippincott, managing director of executive compensation in the Americas for New York, N.Y.-based professional services firm Towers Watson & Co.

“Now, CEOs need to outperform their peers in order for long-term incentives to vest. I think that’s been a positive development in aligning pay and performance in America in a more transparent and objective way.”