Aubrey Bout is managing partner and Brian Wilby is a consultant at Pay Governance LLC. This post is based on their Pay Governance memorandum. Related research from the Program on Corporate Governance includes The Growth of Executive Pay by Lucian Bebchuk and Yaniv Grinstein.
- CEO median actual pay among S&P 500 companies increased 1% in 2019.
- Overall, CEO pay in 2020 will potentially decline by 3% to 4% due to lower bonuses and many companies underperformed during the unprecedented COVID-19 pandemic disruption.
- Historical CEO pay increases have been supported by historical total shareholder return (TSR); in fact, annualized pay increases have been 9 percentage points lower than TSR performance.
- We expect median CEO target pay increases in early 2021 to be in the low single digits due to some companies providing “supplemental grants” for performance equity that was lost during COVID-19.
- Individual CEO pay increases will continue to be closely tied to overall company performance and peer group compensation increases; it is notable that S&P 500 TSR was +18% in 2020, primarily driven by large-cap technology companies.
- Performance share plan usage seems to have peaked with 94% of S&P 500 companies employing them, while restricted stock has cemented its position with 69% prevalence.
- Stock options have continued their steady decline but are still prevalent at 50% of companies.
- There could be an uptick in stock option and restricted stock usage in 2021 due to the COVID-19 pandemic and companies struggling to set long-term goals in their performance share plans.
Introduction and Summary
CEO pay continues to be discussed extensively in the media, in the boardroom, and among investors and proxy advisors. CEO median total direct compensation (TDC; base salary + actual bonus paid + grant value of long-term incentives [LTI]) increased at a moderate pace in the first part of the last decade—in the 2% to 6% range for 2011-2016. CEO pay accelerated with an 11% increase in 2017, likely reflecting sustained robust financial and total shareholder return (TSR) performance, before returning to 3% in 2018 and 1% in 2019, more in line with historical rates. Our CEO pay analysis is focused on historical, actual TDC, which reflects actual bonuses based on actual performance; this is different from target TDC or target pay opportunity, which uses target bonus and is typically set at the beginning of the year.