Kent S. Hughes, managing director of Pennsylvania-based Egan-Jones Ratings Co.'s proxy advisory service, which researches executive pay and other issues for shareholders, said there isn't a rule of thumb about how many "no" votes are too many. But 20 percent or higher strikes him as significant.
"It ought to be a kind of wake-up time to look at things," Hughes said. "Not take knee-jerk reaction, but certainly not let it go by without recognition — and without some outreach to certain institutional investors."
This is the second year of say-on-pay votes mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act. Patrick S. McGurn, special counsel at Institutional Shareholder Services, said boards don't like the votes but do pay attention.
"This has stimulated a great deal of engagement on compensation issues that was never taking place in the past," he said. "We've seen a huge behavioral change in board rooms."
The Baltimore Sun's analysis of pay at local public companies with at least $100 million in annual revenue focused on firms' 2011 fiscal year, except for the handful of companies with a 2012 fiscal year that ended no later than this spring. The typical CEO received 11 percent more than the year before.
That's a much bigger bump than most workers see — even most high-level employees. The typical hourly worker in the United States got a 3 percent raise last year, as did the typical company officer or executive, according to human resources research group WorldatWork.
Pay packages vary in the measures used to qualify executives for incentives and how much that year's performance affects rewards. Otherwise, you wouldn't see two companies with drastically different results give their CEOs essentially the same raise, as did Tessco Technologies of Hunt Valley and Annapolis-based TeleCommunication Systems.
Tessco's Robert B. Barnhill Jr. saw his compensation rise 57 percent, to nearly $2.2 million, in the 12 months ending April 1, as profits jumped 64 percent and the stock price more than doubled.
TeleCommunication increased CEO Maurice B. Tosé's pay last year by 55 percent, to nearly $2.7 million, as the company's profits and stock price were slashed in half. Institutional Shareholder Services said in an analysis that it had a high level of concern about the "pay-for-performance disconnect." (ISS had concerns about Tessco's compensation structure, too, but not about the amount of its CEO pay, which is lower than its peers'.)
TeleCommunication, which makes mobile communication technology, did not respond to requests for comment. Neither did Tessco, a provider of products for wireless broadband systems, though it noted in a Securities and Exchange Commission filing that it "delivered record revenues, gross profits and earnings" that year.
Charles M. Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, thinks the problem with executive pay isn't the outrageous examples so much as the entire system.
Corporate boards believe CEOs will jump ship for a competitor if the pay is better elsewhere, so they benchmark compensation against the amounts shelled out by peer firms. TeleCommunication's board, for instance, said in an SEC filing that it increased Tosé's 2011 base salary nearly 15 percent after determining that 2010's nearly $520,000 was "not at the level which is comparable to Chief Executive Officers in the peer group."
But Elson argues in a new study with co-author Craig K. Ferrere that this reliance on paying at least as well as the typical peer inflates pay — one CEO's raise ripples widely — and is based on a faulty assumption. It turns out that public companies hardly ever hire chief executives from other public companies, he said.
"And when they do move, the results are lackluster to poor," Elson said in an interview. "Executive talent is not transferable — or not as transferable as we thought."
He's hopeful that boards will ditch the peer-group model and pay based on internal factors specific to each company, which could halt the rapidly widening gap between CEOs' paychecks and everyone else's. When the top guy earns tremendously more than his or her employees, including other high-level executives, it has an insidious effect on company performance, Elson said.
"It's … dispiriting to the organization, which creates a longer-term profitability issue," he said.
Baltimore Sun reporters Eileen Ambrose, Steve Kilar, Lorraine Mirabella and Gus G. Sentementes contributed to this article.
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