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DEMOCRATIZING SHAREHOLDER DEMOCRACY

Retail investors are finally poised to take on stratospheric CEO pay

A banner celebrating Rocket Companies Inc., the parent company of U.S. mortgage lender Quicken Loans, IPO is seen on the New York Stock Exchange (NYSE) in New York City, U.S.
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All it takes is a few clicks.
  • John Detrixhe
By John Detrixhe

Future of finance reporter

Published

Wouldn’t it be great if you could say no to sky-high executive pay?

Turns out there’s an app for that. These days it’s as easy for retail shareholders to vote on CEO compensation as it is to order sushi on DoorDash. Just as brokerage apps have democratized investing, making stock and derivatives trading painlessly easy for everyday investors, so too has shareholder voting become almost effortless.

Armchair traders are a big constituency: Individual investors account for about a quarter of the US equity market, up from just 10% two years ago, according to Goldman Sachs. They, like everyone who owns stock in public companies, get to vote on things like board elections, auditors, climate change proposals—and executive compensation.

That means millions of regular people are a few phone taps away from taking a stand against CEOs getting paid around 320-times that of the median for their employees. Shareholder votes have traditionally been mind-numbingly boring, requiring people go through dense paper documentation that typically goes in the garbage. But financial apps like Acorns, Square’s Cash App, SoFi, and Stake use technology from Say, an investor communications platform, which lets you vote on multi-million-dollar executive compensation in just a few seconds. Robinhood, the app that’s synonymous with the retail trading boom, uses a company called Mediant, which offers “one-click” voting.

“We are in the midst of a major transformation,” said Andrew Behar, CEO of As You Sow, a nonprofit focused on shareholder advocacy. While these votes are typically non-binding, boards could face a no-confidence vote from governance groups if they ignore them. “Investors who have traditionally abdicated their power have begun to use their power,” Behar said.

So-called proxy voting has been been going digital for years, but there are reasons to think individual investors could become engaged. Brokerage apps are a key component, but a generation shift, with different priorities, could also be playing a part, according to Sherry Moreland, president at Mediant. “They have a vested interest in the companies they’re invested in,” she said.

How stratospheric executive pay worsens income inequality

Stratospheric executive pay isn’t just insulting—it directly contributes to the widening gap in inequality in America.

CEO compensation soared around 1,200% from 1978 to 2019, far outpacing stock market returns (the S&P 500 Index of large US stocks rallied 740% during that span) and the take home pay for workers, which increased by about 14%, according to the Economic Policy Institute. Soaring CEO pay spills into the pay for other executives, resulting in inflated paychecks for a handful of people at the top of the corporate pyramid that doesn’t trickle down to lower-ranked workers, said Lawrence Mishel, distinguished fellow at EPI. This kind of unbalanced renumeration also seeps into the nonprofit sector and universities.

“Executive pay has been the single largest driver of excessive income growth at the very top,” Mishel said. CEOs in particular make six times as much as the top 0.1% of wage earners.

It wasn’t always this way. For the largest public companies, the ratio of CEO-to-typical-worker compensation was 320-to-1 in 2019, but the ratio was more like 61-to-1 in 1989 and was 21-to-1 in 1965.

There are multiple reasons why executive compensation has skyrocketed. Changes in taxes are probably one of the reasons, said Rosanna Weaver, a program manager at As You Sow. There was a time when when ultra-high executive pay would have been taxed away in the US, giving companies little reason to offer such high compensation. Pay consultants, meanwhile, have an interest in keeping compensation complicated and murky, as it helps them stay employed. Boards have shown little interest in ruffling CEOs’ feathers.

“Whenever people are looking for board members they tend to look in their own social circles,” Weaver said. “Nobody is recommended because they ask really challenging and super hard questions.”

Some may suggest that these disparities are a sign of shareholder capitalism run amuck. But there’s an argument to be made that it’s the opposite—inflated pay for executive management is helpful to upper management but research indicates that it results in worse returns for shareholders. A study of London-listed stocks found that those with the lowest paid CEOs outperformed the ones with highly compensated bosses.

GameStop shows the rise of the retail investor

The idea that the little guy could stand up to entrenched institutional interests doesn’t seem as far-fetched as it used to. Earlier this year, a mass of retail traders banded together on Reddit to go head-to-head with hedge funds over GameStop, a beleaguered video game retailer; the armchair traders managed to inflict serious losses on professional investors who were betting on the GameStop shares to decline.

Granted, the episode had at least a whiff of market manipulation about it. But it was also a reminder that access to information has gotten flatter, and that the proliferation of brokerage apps has altered the stock market game—an army of retail investors can flex its muscles if it chooses to. And most Americans think CEOs are vastly overpaid and support drastic reductions in their paychecks, according to research by Stanford’s Graduate School of Business.

A key question of course is whether retail investors will take advantage of their voting rights. While it’s unclear how many are exercising them, shareholder platform Say says there were 13.5 million investors connected to its systems in March, up from 6.8 million a year ago. “There’s a democratic framework built right in to ownership to the equity capital markets, hidden right in plain sight,” said Alex Lebow, co-founder of Say.

Moreland at Mediant says retail voting in the US has been “notoriously low,” with less than 35% of individual investors having participated in the proxy process. One sign that’s changing is that Mediant is getting more calls and emails about locating voting materials than they used to. “That tells me that there’s a shift,” she said. “Usually when I tell people what I do a living they say, ‘Oh, you mean that stuff I throw I the trash can?'” 

In the meantime, institutional investors are pushing back more often on executive pay. Shareholders including BlackRock, the world’s biggest money manager, rejected a pay package for General Electric CEO Larry Culp that included compensation worth as much as $230 million. So far this year, support from shareholders for exec pay in the US is at it at its lowest since 2011, when “say on pay” votes were made a requirement by regulators, according to Equilar, which compiles data on compensation. Investor support for executive pay has fallen to 87.6%, from as high as 91.8% in 2015.

Weaver is optimistic that a shift is underway, but says executive pay is already so extreme that it will take time for pressure to move the needle on their compensation. “Do I think it could change and do I think it is changing? Absolutely,” Weaver said. “We have seen real improvement.”

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