The global pandemic forever changed Corporate America. As we
emerge from an economic recession amid a deeply divided political climate and a
push for greater racial and social justice, these high-stakes concerns are
already trickling down into the business world—specifically, into executive
Much of that has to do with investors. Today’s investors and
shareholders are concerned about things like climate change, employee treatment
and financial equality—and they’re looking to put their money where their mouth
In light of these concerns, companies are striving to better
reflect the values their investors want, but it’s not always that simple. As
the gap between executive compensation and median employee salaries continues
to widen, competitive pay for CEOs continues to rise, placing companies in a
difficult position. The situation calls for a more strategic approach to executive
Most companies determine CEO pay based on how their peers
and competitors construct compensation. In order to entice CEOs to come and
stay, most want to offer a bit more than the average. But over time, that
practice keeps driving the average up, which could partially explain the size
of the gap between CEO and median employee pay.
The CEO Pay Ratio, or the ratio of CEO-to-typical-employee
compensation, has been steadily rising for the past several years. Recently,
that number has reached new heights: The median CEO Pay Ratio for Equilar 500
companies—the 500 largest U.S. companies by revenue—was 193:1 in 2020.
According to an Equilar study examining early 2022 proxy filings, the CEO Pay
Ratio for Equilar 500 companies was 245:1 in 2021, a sharp increase from 2020.
The consumer cyclical sector had the highest median CEO Pay Ratio at 311:1,
while the energy sector had the lowest at 90:1 in 2020 (Figure 1).
If the ratio keeps increasing as it has in years past, 2022
could be the highest year for the CEO Pay Ratio yet. That’s partly because
compensation for the typical employee is decreasing. In 2021, likely due to
COVID-19, median employee compensation sank to $61,396—down 8.3% from 2020,
according to Equilar’s early proxy season trends study. In fact, 2021 was the
first year since 2018 that compensation for the median employee has decreased
instead of increased. That decrease, coupled with a trend of increasing CEO
compensation, has led to a higher CEO Pay Ratio than in years past.
Of course, that ratio may change as the year progresses. As
of the timing of Equilar’s study, many of the companies that filed their
proxies hire part-time or seasonal employees, and many of the early filings
come from companies with lower employee compensation, such as healthcare and
2022 could be the highest year for the CEO Pay
Nevertheless, based on the evidence thus far, it looks like
the gap between CEO and typical employee compensation has hit a new high. While
rising pay may be good news for CEOs, the stark difference in pay between CEOs
and median employees is cause for concern. Many investors aren’t willing to
support a company that rewards its top executives at the expense of the
In fact, Senators Bernie Sanders and Elizabeth Warren have
introduced a bill that would penalize companies who pay their CEOs 50 times
more than their median employees, forcing those companies to pay an increased
tax rate. While the bill has yet to pass either the Senate or the House, it’s
certainly something to keep an eye on.
In recent years, the value of stock and cash bonuses awarded
to CEOs has increased substantially. While executive pay took a slight hit
during the COVID-19 pandemic, CEO pay appears to have bounced back strongly.
According to the 2022 Equilar 100 study—a review of CEO pay at the 100 largest
U.S. companies by revenue to file their proxies by March 31, 2022—the median
value of stock awards increased by 22.7% in 2021, from $8.6 million to $10.5
million. Meanwhile, cash bonuses increased by 46.4% in 2021, from $2.8 million
to $4.2 million.
During the pandemic, many companies elected to award their
CEOs for staying on board and guiding their organizations through turbulent
times with bonuses and stock awards. For example, David Gibbs, CEO of Yum
Brands, received a bonus of $9.5 million in 2020, despite a sizable drop in
earnings. The Yum Brands board deemed it unfair to punish Gibbs for the
pandemic’s negative impact on earnings. Additionally, Christopher Nassetta of
Hilton Hotels received a bonus of $13.7 million in the form of additional
company shares after the company modified its stock grants to negate its 2020
financial performance from playing a factor in eligibility for executive
As sustainability and human capital become more mainstream
concerns worldwide, many companies are increasing their focus on environmental
and social targets as metrics for executive pay. Demonstrating a commitment to
these issues resonates with investors and shareholders who want to know the
company they’re investing in is socially responsible. Some companies create ESG
targets, while others simply use ESG goals to assess performance.
In a report by PricewaterhouseCoopers and The Centre for
Corporate Governance at London Business School, 45% of companies surveyed had
an ESG target in either their annual bonus, LTIP (long-term incentive plan) or
both. The report also showed an increasing focus on environmental and social
targets—specifically sustainability, climate change and diversity—as well as an
increased use of ESG in LTIPs. Similarly, a 2021 Compensation Advisory Partners
survey exploring CEO pay in 50 companies found that at least half include ESG
metrics in their LTIP, up from just 30% in 2019.
While using ESG metrics in LTIP can be an effective way of
creating positive change and signaling that a company is committed to the
values its shareholders care about, it’s not always that simple. For one thing,
ESG targets can be difficult to measure, and adding too many ESG metrics soon
leads to overcomplication, which may cause a CEO to focus on ESG at the expense
of other business targets. Other times, ESG targets can be met while the
problem goes unaddressed. For example, creating a diversity committee doesn’t
necessarily mean a company has achieved diversity. While there’s no question
that ESG is important, companies must be very strategic and intentional about
using these metrics in CEO compensation.
Keeping these trends in mind, how should companies structure
executive pay moving forward?
Some firms are already becoming more progressive when it
comes to the CEO Pay Ratio, even going so far as to set limits on how much more
an executive can earn. If companies want to attract investors, closing the pay
gap may be a good place to start. If simply lowering CEO pay isn’t a viable
option, then there may be other more responsible ways of structuring executive
According to the Harvard Business School, many company
directors favor variable pay. In a survey of the 250 largest S&P 500 firms,
most revealed that they use a formulaic annual incentive plan with predefined
metrics to calculate CEO pay. These metrics commonly include company profit and
revenue, as well as strategic nonfinancial metrics. 33% of the firms also use a
performance modifier—often based on things like safety, customer service or
employee engagement—to adjust pay up or down. While some of these modifiers
have a large impact on pay (up to 25%), others merely tweak it by 5% or less.
Regardless, the idea of modifiers and variable pay may suggest a smart way
While a high base salary can insulate CEOs from the effects
of poor performance, putting 70% to 80% of the CEO’s pay at risk has the
opposite effect: It provides more incentive to perform well and meet the
Another option is capping top executive salaries, which
Whole Foods has been doing for more than 25 years. While the cap was initially
8:1, the company’s most recent proxy filing prior to going private showed that
the cap had since risen to 19:1—a compromise that’s competitive enough to keep
executives around but low enough to satisfy median employees and potential
When it comes to ESG, the question isn’t whether these
metrics should be linked to pay, but rather how it should be done. In the past,
companies have often viewed ESG and shareholder value as a trade-off, but in
fact, there’s more alignment between ESG and shareholder value than previously
thought. In today’s market, a company that treats its employees well and
engages in sustainable practices is more likely to attract investors.
Since pursuing these practices can lead to lower short-term
performance from a financial perspective, structuring pay based on short-term
targets may encourage CEOs to prioritize financial gain over ESG objectives. By
contrast, setting more long-term targets and lengthening the time horizon of
pay encourages better alignment with ESG.
At the end of the day, there may be no easy,
one-size-fits-all answer to the question of how to keep executive compensation
competitive while also appeasing investors, increasing profit margins and
achieving ESG targets. However, by taking a more deliberate approach, including
considering practices like variable pay and long-term targets, companies can
start moving toward a more strategic and sustainable model of executive
Amit Batish is Editor-in-Chief of C-Suite and Director of
Content at Equilar.