Some IBM shareholders are losing patience with Rometty's big salary

Key Points
  • IBM shareholders narrowly approved a pay increase for CEO Ginni Rometty recently
  • Rometty is among the top-paid CEOs in the S&P 500, but IBM has underperformed its peers
  • Investors criticized the disconnect between compensation and performance to CNBC.
IBM Chairman, President and CEO Ginni Rometty delivers a keynote address at CES 2016 at The Venetian Las Vegas on January 6, 2016 in Las Vegas, Nevada.
Ethan Miller | Getty Images

Big investors are losing patience with IBM chief Ginni Rometty, who remains one of the highest-paid CEOs in not just the tech industry, but among all S&P 500 companies, despite IBM's relatively poor performance under her lead.

At IBM's annual meeting last week, shareholders agreed with a proposal to increase her salary more than 60 percent to $33 million. But the vote narrowly passed, with 46 percent against.

Rometty is in year six of her turnaround plan, and recently lost the confidence of one of her biggest and most famous investors: Warren Buffett, who revealed he's sold a third of his shares since the beginning of the year.

The stock fell 2.51 percent on Friday following the news -- its worst daily performance since April 19 2017 when it dropped 4.92 percent -- making it the worst performing stock in the Dow Jones Industrial Average this week.

Yet, Rometty remains one of the highest paid CEOs in not just the tech industry, but among all S&P 500 companies.

Her $33 million paycheck this year puts her ahead of tech CEOs like Microsoft's Satya Nadella ($18 million), who is successfully steering the company back towards growth, as well as leaders at fast-growing tech giants like Alphabet's Larry Page ($1), Apple's Tim Cook ($9 million) and Amazon's Jeff Bezos ($2 million).

Rometty has presided over 20th straight quarters of declining revenue growth.

Since she became CEO in January 2012, revenue has declined more than 26 percent on a trailing 12-month basis compared to the year before she took over, and net income has fallen nearly 27 percent. Meanwhile, calculations from ISS Analytics show that her disclosed salary has grown by 19 percent per year on average (CAGR) since 2012, concentrated on the final year.

Investors sound off

Proxy advisors Institutional Shareholders Services (ISS) and Glass Lewis, both recommended shareholders vote the recent pay increase down. In fact, ISS puts her pay much higher than the disclosed number, at $50 million, using its own estimate for the value of her stock options. The firm advised investors that the disparity was a red flag.

IBM shareholders CalSTRS and The State Board of Administration for the Florida Retirement System (SBA FLA) each voted against Rommety's proposed pay package at the company's annual general meeting.

"The IBM compensation plan has huge upside for CEO Virginia Rometty and very little downside," wrote CalSTRS portfolio manager Aeisha Mastagni in an email to CNBC. CalSTRS owns 2.2 million shares in Big Blue.

"The company's performance over the three- and five-year time periods has languished behind peers, and the board's response for this underwhelming performance was to give Ms. Rometty 1.5 million options on top of her regular pay," wrote Mastagni.

SBA FLA, which holds roughly 1.3 million shares, or about 0.14 percent of shares outstanding, was concerned about the "general poor relationship between level of compensation and the company's performance," Senior Officer of Investment Programs & Governance Michael McCauley wrote in an email to CNBC.

Academy Capital Management is even more bearish on IBM's prospects. The firm sold all of its nearly 87,000 IBM shares in mid-March, said owner Scott Granowski.

"IBM's business model went away when the cloud arrived," said Granowski.

While IBM has expanded its cloud computing business, it's a hybrid cloud business and not as profitable as what Microsoft, Oracle and Google are doing in this space, he said. And he believes that means IBM's generous capital return program won't be able to continue.

"We don't see excess profits being available for IBM to continue to give back to shareholders," said Granowski. "I think that's why Uncle Warren sold part of his stake."

He added that the decline isn't Rometty's fault, but just the facts of IBM's business. "There's nothing Ginni Rometty could have done differently. She does a good job," he said.

IBM should have been more aggressive: Analyst
IBM should have been more aggressive: Analyst