A Vote Goes Against Outsize Executive Pay, But It’s Hardly a Blow

If you’re against high executive pay, don’t cheer because Oracle’s shareholders overwhelmingly rejected Lawrence J. Ellison’s $78.4 million pay package.

The shareholder vote was instead an illustration of how hollow these ballots can be. Deep down, the big mutual funds that own most of corporate America just don’t care about the issue.

Mr. Ellison’s pay has reached dizzying heights. In 2012, the Oracle chief executive was paid $96.2 million, an amount that was reduced this past year to a mere $78.4 million.

However you slice it and dice it, whether against Oracle’s peers or on a purely numerical basis, Mr. Ellison is paid better than almost any C.E.O. on the planet. This past year, though, Oracle’s share price lagged its peers in performance, something it rarely does.

Given the high dollar figure and the one-year lagging performance, the Change to Win coalition seized the opportunity. The union-affiliated group released a public letter arguing for Oracle shareholders to revolt against management’s compensation. The organization based its case on the indisputable fact that “Mr. Ellison’s pay far outstrips that of the highest paid executives at the companies Oracle has identified as peers,” peers that include Google and Microsoft.

The Dodd-Frank Act gave Change to Win an outlet to push this cause. That legislative overhaul requires public companies to hold nonbinding shareholder votes on executive compensation, called “say-on-pay.”

Last week, shareholders sided overwhelmingly with Change to Win, voting against Mr. Ellison’s pay package at Oracle’s annual shareholder meeting. It wasn’t even close, and if you strip out Mr. Ellison’s 25 percent ownership stake from the voting count, it appears that more 80 percent of shareholders that cast votes, voted no. Coincidentally, institutional investors like mutual funds own about 81 percent of Oracle’s outstanding shares, according to Standard & Poor’s Capital IQ, so it appears that these funds turned against Mr. Ellison.

In many ways, he was an easy target. Take the goal of tying pay to performance. The options granted to Mr. Ellison do not contain any requirement that Oracle outperform its peers. Instead, the package rises and falls with Oracle’s worth in the stock market, which depends on many factors. Not only that, but the package is entirely option grants. This means that Mr. Ellison’s pay is more sensitive to stock market movements, something that other companies have tried to get away from by granting instead restricted stock.

Oracle is an outlier. The company has an unusual pay package and is being targeted because of perceived greed more than anything else. It is viewed as poor form for a billionaire chief executive to pay himself these amounts when he also owns 25 percent of the company. After all, Larry Page and Sergey Brin, who co-founded Google, take no significant compensation, nor does Mark Zuckerberg who founded Facebook. While Mr. Ellison’s lifestyle is expensive, he doesn’t need the money, given that he has a $41 billion fortune, according to Forbes.

Oracle’s aggressive defense may have also worked against it in the shareholder vote. In response to Change to Win, the company’s general counsel, Dorian Daley, defended the package by encouraging Change to Win “to actually read our proxy statement.” Mr. Daley then stated that it appeared Change to Win was complaining because Oracle had overpaid Mr. Ellison by approximately $50 million. Mr. Daley defended this amount, saying it was only 0.36 percent of Oracle’s free cash flow, an amount worth it “to ensure the continued services of one of the country’s most successful entrepreneurs and technological visionaries.”

Based on that measure, by my calculations, Apple’s chief executive, Tim Cook, would have received an additional $185 million or so last year; the C.E.O. of Exxon Mobil would have gotten about $200 million more. Who knew these two were underpaid?

I did read Oracle’s proxy and I was also struck by the company’s assertion that the bulk of its incentive compensation goes to its top executives. Oracle paid two other executives more than $40 million each last year alone.

The company declined to comment for this column.

Oracle shareholders may have won this battle, but corporate America is winning the pay war. In three years of say-on-pay votes, high compensation at the nation’s largest corporations is routinely validated. As of August, 99 percent of Fortune 500 firms had their packages approved in say on pay votes, according to Towers Watson.

The median pay package last year for the top 200 chief executives at public companies with at least $1 billion in revenue was $15.1 million â€" up 16 percent from 2011, according to an analysis by Equilar for The New York Times.

For anyone who might see the Oracle vote as a sign of a change in sentiment toward outsize C.E.O. pay, think again.

The evidence is instead that the big institutional shareholders, the ones that voted against Mr. Ellison, either at best don’t care about changing executive compensation or at worst are being hypocritical, acting only when they have to. This is important because it is these institutional investors that own most of the country’s corporate stock.

Start with the Oracle package. While shareholders voted against Mr. Ellison’s pay, they actually had the means to stop it. Oracle’s incentive stock option program was being expanded and shareholder approval was required to do so. Had shareholders voted no on the incentive package, they could have halted the large option grants given to Oracle executives. But that proposal passed, because half of the Oracle shareholders who disapproved of the pay package thought it was perfectly fine to authorize the options that made the package possible. Oracle’s directors who approved this package were also re-elected.

The differing votes show how say-on-pay can merely be symbolic.

If these large institutional shareholders really cared, they would act to change the system, voting “no” on pay packages based on the structure, as well as the high number. Instead, what we are getting is tinkering and one-time gestures.

Institutional investors do not have much incentive to do much more. They control large pools of cash, but are paid to essentially to make or beat the market by a slight amount. Mutual funds appear to have no desire to effect real change, preferring to sell their shares when trouble arises at companies. They may even accept that such high pay packages are justified for the most part â€" after all, corporate America is worth trillions and this is a small price to pay for good performance.

The result is a hollow political exercise for those trying to push down C.E.O. compensation. Come next year, Oracle will no doubt be paying its executives tens of millions, and the rest of corporate America will not be that far behind.

And the biggest shareholders in the land won’t particularly care, even if they occasionally say they do.