Wells Fargo
Proxy statement: 3/17/2015 Meeting date: 4/28/15
Wells Fargo CEO John Stumpf received total compensation of $21.4 million in 2014, which includes $4 million in non-equity incentive pay, as well as $2.1 million in increase in value of deferred compensation and pension. Stumpf’s salary of $2.8 million was among the highest 15 of companies in the S&P 500.
For the most part companies tend to restrict salary to a small component of total CEO pay, both based on the broadly accepted principle that the primary vehicles for executive compensation should be bonus and equity based, and because of tax laws that prohibit deductibility of the portion of salaries over $1 million.
Wells Fargo’s proxy statement notes that, “In 2014, the Company paid an aggregate of approximately $4.7 million in base salary to its named executives in excess of the combined deduction limit for these executives.” Why?
The compensation committee says that it “determined that the benefits to the Company and stockholders of achieving the appropriate compensation balance outweighed the non-deductibility of salaries and RSR awards granted in July 2014 in excess of IRC Section 162(m) limits.” Further, the proxy suggests that the balance is necessary to “reduce undue focus on short-term financial performance at the risk of the Company’s long-term interests.” One hopes that recent history, common sense, or the equity held by executives might also encourage them to consider the company’s long-term interests.
The compensation committee acknowledges that between the higher-than-deductible salaries and certain incentive grants that do not qualify for deductions, the company forewent approximately $3.1 million in tax benefits “related to the loss of deduction.” The company then creates a contrived statistic, calculating that figure as a percentage of company income before taxes, as if to dismiss it as a rounding error.
The concern isn’t simply the cost to shareholders at this one company, however, but the problematic practice itself and the influence it has elsewhere. A critical component of massive increases in executive compensation overall has been the reliance of inappropriate peer comparisons, and fixed components of pay – such as salary – are often used to perpetuate the “all the other kids are doing it” excuse.
In any case, if the company intends to suggest that its tax loss is a pittance, it might also wish to provide perspective as to how little this non-deductible component of salary truly means for the CEO. In addition to the many millions reported in the summary compensation table, between 2014 and 2013 Stumpf realized over $126 million from exercising stock options and vesting of previously awarded shares. Given this, shareholders may rightly wonder if Stumpf truly needs a salary higher than that of his peers.