Post-Crisis Trends in U.S. Executive Pay

Carol Bowie is an Executive Director of MSCI and head of compensation policy development at ISS. This post is based on an ISS white paper by Subodh Mishra, available in full here.

Though the global financial crisis of 2008 prompted a seismic shift in attitudes toward executive pay on the part of lawmakers, the public, investors, and other stakeholders, average compensation levels continue to rise or have returned to where they were before the crisis.

Mindful of the outcry over particular elements of pay packages, companies began scaling back bonus awards as well as payments related to “golden parachutes” and other forms of exit pay following the crisis.

Indeed, such components of executives’ total annual compensation declined in fiscal 2009 with some elements, including those dealing with exit pay, continuing to decline modestly into fiscal 2010.

But that has been more than offset through increases in other pay elements, most notably awards tied to company stock. The result is a 37 percent surge in total annual compensation paid to C-suite officers from fiscal 2008 to 2010 with stock awards now constituting more than half of the total pay pie.

As such, this post explores how the executive pay package mix and overall total annual compensation levels have changed since fiscal 2008 and the role played by stock-based awards in fueling the spike in total executive pay.


This analysis examined total annual compensation (TAC) for the top five highest-paid named executive officers (NEOs) as well as chief executive officers (CEOs) at Russell 3,000 companies in fiscal years 2008, 2009, and 2010.

Total annual compensation is defined as the sum of pay received from: base salary, bonus, non-equity incentive plan compensation, stock awards, option awards, change in pension value and nonqualified deferred compensation earnings, and all other compensation, such as perquisites.

The calculation will generally match the Summary Compensation Table in a company’s proxy statement with the exception of the stock option value, the calculus for which can be found here.

The analyzed universe covered 2405 Russell 3,000 companies in fiscal 2008, 2699 in 2009, and 2797 in 2010. All data are drawn from ISS’ proprietary compensation database.

Stocking Up

The past three reporting years covering fiscal 2008-2010 has seen a marked shift toward the use of stock-based pay within the overall mix of pay elements for named executive officers collectively.

When segregating trends in pay for just CEOs, however, our analysis finds little difference in the mix of pay elements over the preceding three fiscal years. This suggests a far more pronounced change for NEOs other than the CEO.

In fiscal 2008, base salary was, on average, the largest component of total annual compensation for all NEOs across the full Russell 3,000 universe, constituting 23 percent. Stock-based pay comprised in sum 35 percent of total annual compensation, broken down between stock grants (19 percent) and option grants (16 percent).

As illustrated in Figure 1, “all other pay,” which includes exit pay, perquisites, and tax gross-ups, comprised 18 percent of total compensation, followed by 17 percent for performance-related pay not tied to stock, and bonuses at 7 percent.

By fiscal 2010, the pay mix for the same study group looked radically different. The average salary for Russell 3,000 NEOs had dropped by six percentage points to 17 percent, the same proportion as average non-equity incentive pay in 2008 as well as 2010.

Moreover, all-other-pay saw an eight point decline as a proportion of total annual compensation to 10 percent as of fiscal 2010. Most stark, however, was growth in the proportion of performance-related pay tied to stock, which over the three year period surged a full 16 points to more than half, or 51 percent, of total pay.

Stock award values saw the greatest gains, jumping from 19 to 28 percent, with option awards gaining seven points to comprise 23 percent of total pay as of fiscal 2010, as illustrated in Figure 2.

Driving the shift were significant changes in the underlying average value for the six separate pay elements.

Between fiscal 2008 and 2010, all-other-pay dropped 22 percent in average value for the full Russell 3,000 universe from roughly $340,500 to $267,000. Smaller companies were far more likely to reduce all-other-pay, with declines from 2008-2010 of 36 and 35 percent for Russell 3,000 companies outside the S&P 1,500 and S&P SmallCap firms, respectively. By contrast, S&P 500 companies saw a 9 percent decline in the average value of all-other-pay to just over $692,000 in fiscal 2010.

The findings may appear surprising, given that investor campaigns to rein in elements of all-other-pay following the onset of the crisis were largely directed at large capital companies.

Anti-gross-up shareholder proposals, for example, were filed at corporate giants American Express, Honeywell International, CVS Caremark, and Northrop Grumman.

Shareholder anger over perks such as personal use of corporate aircraft, financial planning services, and security services also was largely directed at larger firms were the values of such benefits often ran into the hundreds of thousands of dollars.

However, when examining trends across sectors, compensation-related restrictions placed on companies drawing funds provided under the U.S. government’s Troubled Asset Relief Program appear to be the primary driver for the steep drop at smaller firms.

Financial Services companies saw a nearly 40 percent reduction in the average value of all-other-pay from fiscal 2008 to 2009, as illustrated in Figure 3. During this period, these companies also comprised nearly one-quarter of all Russell 3,000 companies below the S&P 1500 and 16 percent of all S&P SmallCap firms.

One notable observation from our analysis concerns the relation of all-other-pay to salary. The former is larger on average than the latter, which is surprising given that at most companies individual NEO salary typically is well above that for all-other-pay. However, when accounting for the record CEO turnover evidenced in recent years and the fact all-other-pay includes exit payments to executives, the numbers appear in line with overall market trends.

As the average value of all-other-pay spiraled downward between fiscal years 2008 and 2010, other pay elements, which began to decline going into 2009, rebounded in 2010, leaving all-other-pay as the only form of compensation to decline over the full three-year study period.

Average bonuses for the full Russell 3,000 universe dropped 20 percent from 2008 to 2009, but gained 15 percent into 2010 for a net three year decline of 7 percent. Meanwhile, average incentive awards not tied to stock dropped 2 percent from 2008 to 2009, but surged 37 percent into 2010 for a net, three-year gain of 34 percent.

This suggests a far greater reliance on variable, rather than fixed, pay, perhaps underscoring corporations’ affirmative response to demands to more closely link pay with company performance.

NEOs at Larger Firms See Greatest Gains

Despite the Dow Jones Industrial Average plummeting to a 10-year nadir in the spring of 2009, our analysis found no decline in average total annual compensation across the Russell 3,000 universe. Indeed, average TAC was up from fiscal 2008 to 2010 by 37 percent for all companies, and significantly more so for large and medium sized corporations. During that period, S&P MidCap companies’ average TAC ballooned by 63 percent from roughly $1.8 million to $3 million, while that for SP500 firms jumped by 54 percent to just under $6.4 million. Figure 4 below illustrates the growth in pay across all indices for the three year period studied.

Not surprisingly, NEOs in the S&P MidCap and S&P 500 indices saw the largest gains in the value of stock and option awards over the three year study period. The average value of MidCap company executives’ stock awards surged 165 percent from 2008-2010, while that for option awards jumped by 128 percent. Meanwhile, executives at the largest firms saw average stock award values increase by 143 percent, while those for options gain 103 percent.

By comparison, NEOs at smaller companies, including those in the S&P SmallCap index and those at Russell 3,000 firms falling beyond the S&P 1,500, saw more modest gains—albeit still sizeable—in the average value of stock and option awards. SmallCap company executives saw jumps of 81 and 89 percent in the value of their stock grants and option awards, respectively, over the three year study period, while the smallest of Russell 3,000 firms saw gains of 73 and 81 percent.

The difference between smaller and larger companies appears to stem from the latter making an early shift to variable pay. It appears that as the market began to recover, companies put much more emphasis on variable pay components.

Indeed, the value of stock grants jumped just 15 percent for Russell 3,000 companies beyond the S&P 1500 from fiscal 2008 to 2009, while MidCaps saw a 94 percent spike year-over-year. The numbers are even more pronounced with respect to changes in the value of the option awards.

As illustrated in Table 1 below, the increase in value of stock grants and option awards at smaller companies outpaced those of their larger peers between fiscal 2009 and 2010, though not enough to close the gap evidenced in the prior period.

Share Awards Decline As Pay Grows

As the value of stock-based pay awards ratcheted up, the absolute number of shares underlying those awards has decreased, according to an analysis of ISS compensation data for 2009 and 2010.

For the full Russell 3,000 index, the average number of shares underlying stock awards dropped 19 percent from fiscal 2009 to 2010 while, concurrently, their value rose by 36 percent. Option awards show a more pronounced disparity, dropping 35 percent in terms of the number of shares made available under such awards, while values for such awards jumped 10 percent.

This suggests two discrete trends; first, whether strategically or coincidentally, companies doled out a considerable number of shares for both types of awards as the market hit bottom in 2009; and, second, companies moved away from the volatility of options as markets gyrated in 2010. Figures 4 and 5 show the reduction in stock and option awards, respectively, in terms of the average number of shares underlying such pay.


While many companies have moved to tighten the link between pay and performance in the wake of the financial crisis, a general disconnect is evident when comparing market performance against the average pay awarded to executives in our study.

This is particularly true in the case of the S&P 500 index, for which growth stood at 23.5 percent for calendar 2009, 12.8 percent for 2010, and 39.2 percent over the two year period ending Dec. 31, 2010. By comparison, pay for named executive officers at S&P 500 companies outpaced market gains, as illustrated in Figure 6, including by more than 15 percentage points over the two year period.

The gap is likely to remain going into the 2012 proxy season, with many companies saying they will award incentive pay at or above last year’s levels despite the market, as measured by the S&P 500’s performance in 2011, remaining flat.

A December 2011 survey by pay consultant Towers Watson of 265 mid-size and large organizations found 61 percent expect their annual bonus pools for 2011 “to be as large or larger than those for 2010,” while 58 percent of respondents expect to fund their annual incentive plans “at or above target levels based on their companies’ year-to-date performance.” Moreover, 48 percent of those surveyed expect long-term incentive plans that are tied to explicit performance conditions “to be funded at or above target levels based on year-to-date performance.”

Critically, 61 percent of respondent in the Towers survey said they believe their total shareholder return will decline or remain flat, suggesting a potential flash point as investors evaluate “say on pay” proposals for 2012.

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One Comment

  1. Frank
    Posted Wednesday, May 23, 2012 at 4:32 pm | Permalink

    Thanks for the good information. Especially figure 3 is very useful for my thesis.



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