An Equilar publication featuring commentary from Meridian Compensation Partners
Following a year of uncertainty amidst the COVID-19 pandemic, the state of executive compensation and the long-term effects associated with the pandemic remained unclear. In 2020, executives, including chief executive officers (CEOs), generally saw declines in overall pay, as several executives took pay cuts in an effort to conserve immediate cash flow in light of economic lockdowns and other restrictions. However, despite the disruption and chaos caused by the pandemic, the market performed well in 2020, and CEO pay, though slightly down, remained steady compared to recent years.
The 2022 edition of CEO Pay Trends offers insight on how CEO compensation was structured in 2021. The publication reveals that across Equilar 500 companies, CEO compensation has rebounded strongly from pandemic levels, increasing by 18.9% to $14.2 million at the median in 2021. CEOs in the technology and energy sectors experienced the largest pay bumps in 2021, while the consumer defensive sector witnessed the largest drop in compensation for its chief executives.
Stock Awards Rose in 2021, Driving the CEO Pay Bounceback
With CEOs electing to take salary cuts and forgoing their bonuses in 2020, cash compensation consequently dipped. However, in 2021, CEO compensation increased across all pay components—with options being the lone exception. Salaries increased 2.6%, annual bonuses rose 29.3% and other compensation jumped 4.7% from fiscal year 2020. Meanwhile, the median value of stock awards for Equilar 500 CEOs increased by 12.3% in 2021, up from $6.3 million to $7.1 million. Technology CEOs had the highest median stock awards, valued at $11.2 million, contributing to the sector’s large jump in overall compensation.
As a result of the COVID-19 pandemic, many companies elected to reward their CEOs for staying on board and guiding their organizations through turbulent times through bonuses and stock awards over the last two years, hence the spike in values for both pay components. The trend, coupled with the fact that the economy roared back in 2021, is likely a leading factor driving the spike in overall pay for CEOs at Equilar 500 companies.
With respect to long-term incentives (LTI), time-based stock was the only LTI vehicle to increase in prevalence across Equilar 500 CEO pay packages in 2021, included in 74.2% of CEO pay plans. On the other hand, time-based options continue to decrease in popularity, falling below 50% for the first time in the study period. Furthermore, as investors continue to press for executive pay to closely align with company performance, the median LTI equity mix for Equilar 500 CEOs was 62.1% performance-based and 37.9% time-based in 2021, continuing a growing trend since 2019.
CEO Pay Continues to Increase at a Faster Pace Than Median Employee Pay
With Equilar 500 CEO compensation seeing a large spike in 2021, the CEO Pay Ratio—the ratio of CEO-to-median-worker compensation—followed suit. The median Equilar 500 CEO Pay Ratio increased by nearly 10% from 190:1 in 2020 to 208:1 in 2021, the highest increase of the study period.
Currently, the CEO Pay Ratio is not a leading indicator of whether or not a company will receive a negative Say on Pay vote. However, Equilar 500 companies with low approval ratings are also more likely to have higher CEO Pay Ratios, and companies with lower CEO Pay Ratios are more inclined to garner higher approval ratings. Across all three years of the study period, companies that failed Say on Pay had the highest median CEO Pay Ratio.
Of course, the COVID-19 pandemic has left a lasting impression on how HR teams approach matters related to employees and other human capital management (HCM) issues. It would come as no surprise if the CEO Pay Ratio attracts more attention, particularly as several lawmakers have made it a mission to penalize companies with excessively high pay ratios. Nevertheless, with the ratio being just under five years old, the interest of the median employee could become a greater factor in the coming years.
Download the PDF to also view the methodology, key findings and data point and figures.
Beyond the Numbers – A Q&A With Adam Hearn
Equilar sat down with Adam Hearn, Senior Consultant at Meridian Compensation Partners, to provide additional perspective on the trends uncovered in CEO Pay Trends and topics related to CEO compensation. Below is a snapshot of the conversation with Hearn. A deeper dive into this discussion can be found at the end of the PDF report.
Equilar: CEO pay at Equilar 500 companies bounced back strongly from the pandemic as compensation surged to $14.2 million at the median in 2021, up from $12 million in 2020. What are the key factors driving this trend?
Adam Hearn: As the world settles into the third year of COVID-19, we view the recent uptick in CEO pay more as a return to historical averages and less as a “surge.” Understandably, in the early stages, companies across industries responded to the pandemic in a myriad of ways. Both organizations and executives were initially in crisis mode, though that frequently resulted in positive earnings within certain industries, driven by exceptionally hard work and careful management of expenses. For one to two years, pay levels remained flat for many executives and independent directors and/or there were significant reductions in cash compensation (and well below target bonus payouts and PSU outcomes), based on often unreachable performance targets. Most of the 2021 increase is due to well above target bonus payouts. In addition, the recent increase in CEO pay, when amortized over the period of the pandemic, is more in line with where CEO pay levels would have been if typical annual increases (i.e., 3%-5%) had taken place.
With macroeconomic factors complicating visibility over the next twelve months, it will be interesting to watch CEO pay trends in the short-term. Record inflation, stock market volatility, the conflict in the Ukraine, ongoing supply chain uncertainty and the prospect of a recession may impact companies’ eagerness to increase CEO compensation. That said, the competitive landscape for high-level talent will likely ensure that CEO pay continues to increase, so long as there is sufficient alignment with company performance.
Equilar: How should companies prepare for the SEC’s potential “pay versus performance” disclosures? What impacts would these disclosures have on the CEO pay landscape?
Hearn: It is always challenging to suggest how companies can prepare for speculative updates to disclosure rules when the SEC has not provided clear guidance. With respect to potential “pay versus performance” disclosure requirements, these challenges are particularly difficult for a variety of reasons. The proposed (and overly-complex) rules may require companies to disclose additional financial performance measures that are not currently mandatory (e.g., pre-tax net income, net income, total shareholder return, etc.). Further complicating matters, some companies may not yet be in the habit of regularly calculating one or all of these metrics.
The most difficult and time-consuming requirement might be the disclosure of a peer group utilized for calculating relative total shareholder return. While many companies disclose a group of peer companies
used for benchmarking executive pay levels, there are a variety of reasons that it might be unwise to use that same group of companies to assess relative total shareholder return (e.g., size, industry-relevance,
stock price correlation, dividend policies, capital structures, etc.). Though the SEC has not yet finalized the disclosure requirements, companies would be well-served by beginning to think about the most appropriate comparator group for evaluating relative performance in future public disclosures.
Ultimately, from our perspective, the final “pay versus performance” rules are unlikely to significantly impact the CEO pay landscape. Regardless of the final wording of the updated requirements, the additional information that will be required to be disclosed will have limited value. More specifically, evaluating an average of total compensation for a company’s four most highly compensated named executive officers (note: CEO is excluded from this calculation) will most often be an “apples-to-oranges” exercise. In other words, while one company’s named executive officers might include a chief operating officer, chief legal officer or chief human resources officer, another company’s named executive officers might include three division presidents. Additionally, “pay” is not necessarily defined consistently from one company to another. Finally, there will be uncertainty around the number of years included in this calculation, given that five years may be required for the calculation but the proxy currently only discloses three years of historical compensation. It is unclear that shareholders/investors will be able to glean any useful information from such a disclosure. It is even less clear that boards of directors would use this information to make important decisions regarding CEO compensation.
For more information watch What’s Next in CEO Pay: Keys to Effective Practices
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