How CEO pay in America got out of whack
The Economist, 2020-07-11
Widely Held Incorrect Assumptions
Generous CEO rewards are the reflection of the companies’ financial performance.
Firms must pay top dollar for CEOs as the competition for talent is global.
Superior CEO performance is maximizing shareholder returns.
Boards are good at hiring good CEOs.
Benchmarking CEO pay against other firms is helpful (no, it just ratchets up the pay for everyone. Actually, it’s not a bad idea for first-time CEOs to be paid below median).
Some Numbers (We Love Numbers, Correct?)
Median CEO pay in the US is $14m p/a [includes stock grants/options/etc., i.e. “realized compensation”]
Realized Compensation grew ~7% YoY in 1978-2019 and grew 14% in 2019.
More than 50% of exec comp is bonuses + stock grants and options.
In more than 60% of cases between 2007 and 2016 CEO pay was not correlated with 10-year returns.
Companies paying CEOs 12x (top quartile) of bottom quartile CEOs only did 2x financial return. Second lowest-pay quartile CEOs got 3x of bottom quartile CEOs with inferior results.
COVID-related “taking $0 salaries by bosses” is not what it seems. Each “foregone” dollar of salary will be more than compensated for by incentive pay should the shares rebound.
Share prices of many companies are back to pre-COVID levels, exec salaries may continue to rise.
Energy firms’ CEOs got bonuses for oil price spikes (did they influence those spikes?).
Despite the independence of Compensation Committees, CEOs have a huge say in their pay.
COVID tempts CEOs to renegotiate performance targets to more easily achievable.
“Say on pay” by shareholders (as opposed to the Directors).
Replace “common pay” packages with 3-year performance measures with 5-year measures or delay payouts from equity grants for 5+ years. However, this may force the increase of the base pay to compensate for the longer wait.
Don’t use benchmarks.