Introduction

Followed by a strong year in 2021, where median actual total direct compensation (TDC) pay increased +14% driven by higher actual bonus incentive payments, and in line with consecutive positive total shareholder return (TSR) results — increasing +31%, +18% and +29% in 2019, 2020 and 2021, respectively — median S&P 500 CEO pay remained flat in 2022. This leveling off of pay was a result of lower actual bonus incentive payments and a substantial decrease in TSR of -18%.

Historical Trends in CEO Actual TDC Pay

Historically, CEO actual TDC pay increased at a modest rate: in the +2% to +6% range for 2012-2016. CEO actual TDC pay accelerated with an +11% increase in 2017 — likely reflecting sustained robust financial and TSR performance — before returning to +2% in 2018 and +1% in 2019, more in line with historical rates. Despite strong TSR in 2020, CEO pay remained flat largely due to the negative impact of the COVID-19 pandemic; 2021 reached a record high in actual TDC and strong TSR performance whereas in 2022 the slowdown of TSR and financial performance resulted in lower actual bonus incentive payments.

In 2022, similar to 2020, we observed the lowest CEO pay change over the past decade, which was in part explained by a lowest 1-year TSR for 2022 (-18%) over the last 13 years (Figure 1).

Our S&P 500 CEO pay analysis is focused on actual TDC for CEOs with >3 year in tenure, which reflects bonuses based on actual performance; this is different from target TDC or target pay opportunity, which reflects target bonus and is typically set at the beginning of the year.

Figure 1.

CEO Pay Continues to be the Main Focus in Current Environment

In 2022, most CEOs navigated an economic slowdown compared to the strong year of 2021. Median S&P 500 CEO actual TDC remained flat driven by lower actual bonus incentive payments offsetting the increase in salary and long-term incentive (LTI) awards. Compared to the previous year, 2022 median and actual bonus incentive payments decreased -15%, while base salary and actual LTI increased +4% and +9%, respectively. Median S&P 500 CEO actual TDC generally remained flat for most business sectors, with Consumer Staples and Real Estate seeing the highest increases year over year of +19% and +10%, respectively.

The decrease in actual bonus incentive payments and no growth in CEO actual TDC is correlated with the decrease of -18% in the S&P 500 TSR performance over the 2022 calendar year.

However, 2023 financial performance has recovered, and unemployment rate continues to be low, though several high growth industries like technology and life sciences experienced substantial layoffs in 2023. Although inflation has subsided since the 2022 peak of ~9%, there are continued supply chain issues, geopolitical influences, layoffs, and business uncertainty into 2024.

Despite the market volatility having presented major challenges for companies during the year, we expect 2023 CEO actual TDC pay data to increase in the low single digits, likely due to larger LTI awards provided, in part, for retention.

Trends in CEO LTI Vehicles

In 2022, performance-based shares continued to be the most prevalent LTI vehicle (Figure 2). The prevalence of performance-based shares has slightly increased while options have seen a decrease. Meanwhile, the use of time-based restricted stock / restricted stock unit (RSU) awards has stayed relatively consistent with the previous year (69%).

For the years 2023 and 2024, we anticipate the continued use of performance-based shares, coupled with a relatively slight increase in time-based restricted stock / RSU awards. The rise in performance-based plans throughout the years can largely be attributed to the introduction of Say on Pay in 2011 and the preferences of proxy advisors and many shareholders toward LTI systems that they consider to be “performance based.” (Note: the proxy advisors generally do not consider stock options to be performance based.)

Figure 2.

Trends in CEO Actual TDC versus S&P 500 Index Performance

In recent years, CEO actual TDC pay increases have been supported by strong TSR. In fact, pay increases over the last 10 years have trailed TSR performance by ~8% when examining the compound annual growth rates (CAGR) of compensation and shareholder return over the last decade: the TSR CAGR was 12% while CEO pay grew at 4%. TSR performance is notable for 2019, 2020, and 2021 (+31%, +18%, +29%, respectively), which supports the significant increase in CEO pay in the last few years. Likewise, during the downturn observed in 2022 TSR (-18%), the pay remained flat in the aggregate.

There is a positive correlation between share price performance and CEO pay. In a positive stock price environment, Compensation Committees are often more supportive of CEO pay increases, typically delivered via larger LTI grants, while CEO base salaries increase modestly or periodically (i.e., less frequently than on an annual basis) and comprise a small portion of the executive pay package. Annual actual bonus incentive payments, though not as significant as the LTI portion of total compensation, can have a meaningful impact on whether compensation grows year over year. When a company is having a good year and is exceeding budget goals as well as investor and analyst expectations, the CEO’s actual bonus incentive is often paid above target and increases year over year (often, the share price also increases as company performance is strong). That said, there will be some years where a CEO’s actual bonus incentive payments are above target when the company exceeded its budgeted goals while the share price declines due to stock market volatility or correction and sector rotation. The opposite can also happen, goals are not met, resulting in lower actual bonus incentive payments while the stock market goes up.

Looking Ahead

Financial performance was mixed in 2023, the labor market cooled slightly, and layoffs and restructuring continued in many sectors. On the other hand, a lower percentage of economists are predicting a recession in 2024 (compared to this time in 2023) as the Federal Reserve has signaled it may cut rates as inflation continues to come down — there is increased optimism that a “soft landing” may be achievable. We expect continued negative pressure on executive pay from the media, the government, social activists, proxy advisors, and some institutional investors.

Below are our CEO pay projections:

1. CEO actual TDC for 2023 is likely to increase in the low single digits, as actual bonus incentive payments will likely be down from 2022 (will vary by industry) but will be offset by larger LTI grants made in early 2023.
2. In 2024, given continued uncertainty in the economy and as Compensation Committees continue to be cautious, we expect CEO target pay to increase in the low single digits.

Methodology

The CEO actual TDC pay analysis consists of S&P 500 companies led by CEOs with a ≥3-year tenure. Actual TDC reflects the sum of base salary, actual bonus incentive payments, and reported grant date fair value of LTI awards. Our analysis of consistent incumbent CEOs was designed to highlight true changes in CEO compensation (as opposed to changes driven by new hires or internal promotions, which typically involve ramped-up pay over a period of 1-3 years).

Note on Realizable Pay

Our methodology used year-over-year CEO actual TDC and was based on the accounting value of LTI as reported in proxy summary compensation tables. These amounts are more akin to pay opportunity than realizable pay, which includes in-the-money value of stock options, ending period value of time-based restricted stock / RSU, and estimated value of performance-based shares. Our past research has shown a strong correlation between realizable pay and TSR performance. While we have shown there is a positive correlation between CEO annual TDC increases and TSR performance, we are confident the correlation is not as significant as that between realizable pay and TSR increases.

General questions about this Viewpoint can be directed to Aubrey Bout (aubrey.bout@paygovernance.com) or Brian Wilby (brian.wilby@paygovernance.com).

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