Breaking ranks, ClearBridge's Kagan frets over CEO pay 'arms race'

Sun Jul 12, 2015 7:45pm EDT
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By Ross Kerber

BOSTON (Reuters) - U.S. companies often pay their CEOs far too much compared with their lowest-paid workers as boards of directors compete to compensate their top executives more than peers.

That harsh critique actually comes from one of Corporate America's friends.

"It would be healthier for our society if CEOs were paid less," said Michael Kagan, who oversees about $9 billion in assets as a senior portfolio manager at ClearBridge Investments in New York. "You have this arms race, where people look at peers to see the pay is fair, so pay is raised year after year."

Even though Kagan's vehicles like the ClearBridge Appreciation FundSHAPX.O generally vote to back management on executive pay, he worries the comparisons companies use to set compensation have helped drive rewards to levels he called "enormous," as corporate boards look to outdo each other.

Kagan's comments mark a rare exception to the stance of most mutual fund executives to not discuss executive pay in detail. Still, that could be changing as years of debating compensation rates at U.S. companies make professional investors more comfortable talking about the subject, said Stephen Brown, a corporate governance consultant and former head of the Society of Corporate Secretaries and Governance Professionals.

"I wouldn't be surprised if you see more portfolio managers start to talk about it as they get more used to it," said Brown, adding that Kagan's remarks on CEO pay were the most critical he could recall from a mainstream fund manager. Plus, it's easier to talk about CEO pay when companies are well-run, Brown said. "What he's voicing is this reality that when you perform, people have less to complain about with pay."

Critics say the funds industry could do more to restrain CEO compensation. That view is shared by Barney Frank, the former Massachusetts congressman and an architect of the widely held advisory votes on pay.

Median pay for CEOs of S&P 500 companies reached $10.3 million in 2014, from $7 million in 2009, according to compensation data firm Equilar. Equilar spokesman Dan Marcec said more than 90 percent of the S&P 500 benchmark pay against at least one peer group and usually try to pay their CEOs above the median.   Continued...