Estée Lauder Companies’ Fabrizio Freda is the second-most “overpaid” CEO among those at companies on the S&P 500, according to an annual ranking by a shareholder advocacy group.
The firm As You Sow’s ninth annual report on the “Top 100 Overpaid CEOs,” released in mid-February, finds that Freda ranked highly on the list after receiving a $65.9 million compensation package during the study’s one-year tracking period ending on June 30, 2022. The report argues that, despite shareholder returns of 27% annually for the five-year period before that date, the pay relative to that growth far exceeds that of the company’s peers. This comes at a time when shareholders are increasingly voting against CEO pay hikes.
The list ranks the compensation packages as “overpaid” based on three weighted criteria: a level of “excess pay” calculated based on how the CEO’s salary stacks up to company performance, the percent of shareholder votes against the compensation package, and the ratio of CEO pay to the median worker pay. Freda’s compensation package was calculated to contain over $50 million of “excess pay,” based on company performance. A majority of institutional shareholders rejected the package, with 70% voting against it. The compensation package was 1,965 times higher than that of the median worker at ELC.
Other beauty-related companies on this year’s list were Johnson & Johnson, which came in 50th, and Procter & Gamble, which ranked 51st. S&P 500 members Bath & Body Works, Colgate-Palmolive and Ulta Beauty were not among the 100. By focusing exclusively on the S&P 500, the study did not evaluate many of the world’s beauty conglomerates such as L’Oréal Group, Unilever and Shiseido.
The “excess pay” calculation is based on a ”regression analysis comparing CEO pay to company financial performance returns to shareholders,” according to the report. It takes into account total return in capital gains and dividends on the company’s shareholder equity. Using this method, Freda’s compensation was calculated to be 331% higher than what would be expected based on the company’s performance.
According to ELC’s proxy statement for the year included in the report, Freda was granted “two long-term (non-annual) equity awards with a combined aggregate grant date fair value of $40 million,” in order to “further align his interests with those of our stockholders and motivate his continued stewardship of our business, brands, talent base and reputation over the longer term.” It also stated that “The awards cover a period of about four-and-a-half years in total, a longer period than typical in many executive compensation programs. A key element of the design is that, as a general matter, Mr. Freda needs to remain in his position through at least June 30, 2024 to satisfy the service requirement, with shares not being delivered until September 2025.”
ELC’s proxy statement also describes “significant fluctuations year-over-year due to the value and timing of additional (non-annual) equity awards.” Since the time period recorded in the study, Freda’s new compensation package was lowered to $25 million, according to company’s newest proxy statement from its fall 2022 shareholders meeting. The decrease was attributed to $50,429,620 in stock awards that had been included in his compensation package for the 2021 fiscal year. The CEO-to-median-worker pay ratio decreased to 872:1.
A representative for ELC stated that “more than half of this compensation was dependent upon the Company’s future” for both the 2021 and 2022 fiscal years.
The majority of shareholders, however, were not convinced about the $65.9 million package. Their non-binding 70% opposition vote came as more institutional shareholders have been rejecting high CEO pay packages. This has been a growing trend since the passage of the Dodd-Frank Act in 2010 required companies to offer what has been coined “say on pay” votes on executive compensation.
“The reason why people vote against it is that it’s excessive, even for a financially successful company like Estée Lauder,” said R. Paul Herman, CEO of HIP Investor, which ran the data analysis for the report.
One reason for the investor revolt could be the fact that astronomical CEO pay doesn’t result in shareholder value, argues the report. It states that companies on the Overpaid CEOs list actually tend to perform more poorly financially than the overall S&P 500. Since 2015, all but one report has shown that the aggregate list underperformed compared to the S&P 500, in terms of financial returns and reinvested dividends. The top 10 companies on the list did even worse in these areas, with underperformance compared to teh entirety of the overpaid list and the S&P 500 index overall.
“When we looked at its shareholder votes, Estée Lauder is really insulated from the wills of shareholders,” said report author Rosanna Landis Weaver, the director of wage justice and executive pay at As You Sow. She noted that the institutional, or Class A, shareholder votes were dramatically different from the 9% of Class B shareholders, or company “insiders,” that voted against the package.
ELC’s proxy statement notes that, although the institutional shareholder vote is non-binding, the compensation committee members “value the opinions expressed by stockholders.”
According to Herman, family-run companies like ELC can have structures that lead to excess CEO pay.
“In a lot of founder-driven companies, where the founder hand-picks the successors in the management team, the [founders] have significant influence. So the founders aren’t making a lot of formal CEO pay, but [they have] original stock; they take their income as share owners rather than as managers,” said Herman. “The only reason the CEO is able to collect those amounts is the design of the plan that is approved by the Lauder family.”
The Lauder family now owns approximately 38% of Class A stock and about 86% of the voting power. Class A shares have one vote per share, while Class B has 10 votes per share.
The report also argues that the high ratio of CEO pay to median employee pay does not reflect the value that the CEO is actually delivering to the company relative to other employees.
As part of ELC’s pay ratio disclosure, which listed median employee pay as $33,586, fit stated that over 25% of workers “within the scope of the pay ratio rules are part-time or temporary” and 70% of them are outside the U.S.
Huge pay ratios between one top executive and employees could be one of the major factors linked to shareholder value, said Herman, who noted the dampening effects they can have on employee morale. Employee morale has been shown in other studies to have links to shareholder value.
“What it says is that they don’t respect employees as much as they respect their CEO. Estée Lauder has strong performance over the long term, so they could choose to pay more to their employees, to their frontline employees, to their managers, and the like,” said Herman. “It’s offensive, it’s disrespectful and it’s not representative of who’s creating the value.”