Shareholders, the general public and the media have been complaining for some time about the dramatic increase in executive pay over the last decade or so. However, activist investors have rarely focused on this issue. That is finally starting to change as activist funds are taking up the compensation cause, shining a spotlight on and airing opinions about whether management deserves what they get.
Executive pay is new activist target
Senior management at public companies best beware, as their compensation is increasingly becoming an issue. “Compensation was not something activists cared about a great deal, unless they could use it as a wedge to get something else done,” explained Francis Byrd, a corporate-governance expert. “That’s starting to change.”
Liz Hoffman of the Wall Street Journal highlights that activists have made compensation an issue at Qualcomm, DuPont and Perry Ellis over the last few quarters. Complaints range from compensation plans that encourage the wrong kinds of growth (say boosting revenue at the expense of profitability) to nonstandard financial metrics that reward execs even when business is poor.
Execs at these companies typically reply that say these critiques are inaccurate and that limited pay packages makes it hard to keep top talent. They often defend the large compensation by noting that exec pay is mostly stock, which means that execs are (theoretically) in the same boat as shareholders. Opponents point out the fallacy in that theory is that exec stock grants are regularly readjusted based on the current price of the stock. Moreover, some long-term senior execs in public firms have so many company shares they can literally sell thousands or tens of thousands of shares every month for years at a time.
Analysts note that activist funds do not usually choose their targets solely on executive pay. Problems with corporate operations are generally considered more persuasive, but more activists are embracing the idea of appropriate executive incentives.
The Shutterfly situation
Digital photography firm Shutterfly is a useful example of the nascent trend of activists focusing on exec pay. Activist hedge fund Marathon partners is looking for three board seats at a shareholder vote scheduled for Friday, June 12th. In describing Shutterfly’s compensation plans, the founder of Marathon Partners Equity Management said once the fund “started peeling back the onion”, it discovered “a compensation scheme that had run amok.”
Marathon’s main complaint is that the firm’s compensation plan rewards growth over profits. Shutterfly defended its pay plan, but it has modified the metrics used to calculate pay. The company noted that changes to the plan “appropriately reflect stockholder views while also balancing the critical importance of retaining key employees.”
In related news, Valuewalk reported last month that activist funds tend to target firms that have a high percentage of unhappy shareholders.
Is this the revenge of David Winters? Only time will tell..