Wouldn’t it be great if you could say no to exorbitant executive pay?
Turns out there is an app for it. These days, it’s as easy for retail shareholders to vote on CEO pay as it is to order sushi on DoorDash. Just as brokerage apps democratized investing, making it easier for everyday investors to trade stocks and derivatives, shareholder voting has become almost effortless.
According to Goldman Sachs, individual investors make up about a quarter of the US stock market, down from just 10% two years ago. Like anyone who owns shares in public companies, they have the right to vote on issues such as board elections, auditors, climate change proposals and executive compensation.
That means millions of ordinary people are just a few phone calls away to take a stand against CEOs who are paid roughly 320 times the median of their employees. Shareholder votes have always been terribly boring, forcing people to go through dense paper documentation that usually goes in the trash. But financial apps like Acorns, Square’s Cash App, SoFi, and Stake use technology from Say, an investor communications platform that lets you vote on multi-million dollar executive pay in seconds. Robinhood, the app that’s synonymous with the retail boom, uses a company called Mediant, which offers one-click voting.
âWe are in the midst of a major transformation,â said Andrew Behar, CEO of As You Sow, a nonprofit focused on shareholder advocacy. While these votes are generally not binding, boards could face a vote of no confidence from governance groups if they ignore them. âInvestors who have traditionally abdicated their power have started to use their power,â Behar said.
Proxy voting has gone digital for years, but there is reason to believe that individual investors could get involved. Brokerage apps are key, but a generational shift, with different priorities, could also play a role, according to Sherry Moreland, president of Mediant. âThey have a vested interest in the companies they invest in,â she said.
How stratospheric executive compensation exacerbates income inequality
Stratospheric executive pay isn’t just insulting – it directly contributes to widening the inequality gap in America.
CEO compensation soared about 1,200% from 1978 to 2019, far outstripping stock returns (the S&P 500 index of large US stocks rose 740% during this period) and workers’ take-home pay, which increased by about 14%, according to the Institute for Economic Policy. Soaring CEO salaries spill over into the pay of other executives, resulting in inflated paychecks for a handful of people at the top of the corporate pyramid that don’t trickle down to lower-ranked workers, said Lawrence Mishel, distinguished colleague at EPI. This kind of imbalanced pay is also seeping into the nonprofit sector and universities.
âExecutive compensation has been the main driver of excessive revenue growth all the way up,â Mishel said. CEOs in particular earn six times as much as the richest 0.1% of employees.
It hasn’t always been that way. For larger state-owned companies, the ratio of CEO pay to typical workers was 320 to 1 in 2019, but it was instead 61 to 1 in 1989 and 21 to 1 in 1965.
Executive compensation has skyrocketed for several reasons. The tax changes are probably one of the reasons, said Rosanna Weaver, program manager at As You Sow. There was a time when extremely high executive compensation was imposed in the United States, giving companies little reason to offer such high compensation. Compensation consultants, on the other hand, have an interest in keeping compensation complicated and obscure as it helps them keep their jobs. Boards of directors have shown little interest in ruffling CEO feathers.
âWhenever people look for board members, they tend to look in their own social circles,â Weaver said. “No one is recommended because they ask really difficult and very difficult questions.”
Some may suggest that these disparities are a sign of derailed shareholder capitalism. But there’s an argument to be made that it’s the opposite: Inflated executive compensation is useful for senior management, but research indicates that it translates into worse returns for shareholders. A study of listed stocks in London found that those with the lowest paid CEOs outperformed those with highly paid bosses.
GameStop Shows The Rise Of The Retail Investor
The idea that the little guy can resist entrenched institutional interests doesn’t seem as far-fetched as it used to be. Earlier this year, scores of retail traders banded together on Reddit to take on hedge funds at GameStop, a struggling video game retailer; salon traders managed to inflict serious losses on professional investors who bet on the decline of GameStop stocks.
Admittedly, the episode at least had a whiff of market manipulation about it. But it was also a reminder that access to information had become flatter and that the proliferation of brokerage apps had changed the stock market – an army of retail investors can be flexible if they so choose. And most Americans believe CEOs are grossly overpaid and support drastic cuts to their paychecks, according to research from the Stanford Graduate School of Business.
A key question is of course whether retail investors will benefit from their voting rights. Although it is not known how many exercise them, the shareholder platform Say reports that 13.5 million investors were logged into its systems in March, up from 6.8 million a year ago. âThere is a democratic framework built right into the ownership of the stock markets, hidden from view,â said Alex Lebow, co-founder of Say.
Moreland of Mediant says the individual vote in the United States has been “notoriously low”, with less than 35% of individual investors participating in the proxy process. One sign that is changing is that Mediant is receiving more calls and emails regarding the whereabouts of voting material than ever before. âIt tells me there is a change,â she said. âUsually when I tell people what I do with my life, they say, ‘Oh, you mean what I throw in the trash?’â
In the meantime, institutional investors more often postpone executive compensation. Shareholders including BlackRock, the world’s largest fund manager, have rejected a compensation package for General Electric CEO Larry Culp that included compensation of up to $ 230 million. So far this year, shareholder support for executive compensation in the United States is at its lowest since 2011, when the âsay on compensationâ vote was imposed by regulators, according to Equilar, which compiles reports. compensation data. Investor support for executive compensation fell to 87.6% from 91.8% in 2015.
Weaver is optimistic that a change is underway, but says executive pay is already so extreme that it will take time to put pressure on their pay. “Do I think it might change and do I think it does change?” Absolutely, âWeaver said. “We have seen real improvement.”