During 2021, CEO pay among Equilar 500 companies—the 500 largest U.S. companies by revenue—recovered strongly from two previous years of stagnation and decline. Undergirded by rising equity values throughout most of the year, CEO median total compensation rose from $12 million in 2020 to $14.2 million in 2021, an increase of 18.9%. While certainly a significant year-over-year increase, after three years hovering near the $12 million mark, this rise may be better understood as a return to the historical trendline of CEO pay growth.
In commentary provided for Equilar’s 2022 CEO Pay Trends report, Adam Hearn, Senior Consultant at Meridian Compensation Partners, outlined factors contributing to the direction of growth in recent years. Hearn noted that performance targets set pre-pandemic were rendered unreachable for many companies, contributing to reduced incentive payouts and lower pay delivered overall. By contrast, much of the increase in 2021 compensation to CEOs came in the form of above-target bonus payouts. Additionally, he notes that when amortized over the pandemic period, the 2021 increase looks a lot more in line with typical annual increases.
Indeed, according to Equilar research, had median compensation risen at a historically consistent rate of 5% each year since 2018, expected compensation among Equilar 500 companies in 2021 would have been approximately $14.1 million, just below the actual level observed in the data.
Instead, CEO pay growth ground to a halt in 2019, remaining flat at $12.2 million, the same level as in 2018. While difficult to pinpoint the exact causes for this period of stagnation, especially strong growth in CEO pay the prior year (up about 10% at median) and uncertainty during the LTI granting season in the first quarter of 2019 may have given compensation planners reason to be cautious with increases. Whatever the contributing factors, despite generally strong financial performance during 2019 for large companies, median direct compensation to Equilar 500 CEOs did not have time to rebound before heading into the maelstrom of 2020.
In the same period of 2018–2019, CEO transitions climbed to a historic high, supported by growth and pushed along by the current of #MeToo, which spurred a significant number of CEO exits among prominent companies. Announced departures among Equilar 500 companies totaled 80 in 2018, and 78 in 2019, with typical rates over the last 10 years of between roughly 40 and 60 transitions per year. Researchers from The Conference Board and Georgetown University found that there were elevated levels of forced CEO departures in 2018 in particular. Of those forced exits, more than half of those among S&P 500 companies that year were due to personal misconduct. This number has since declined significantly, falling back to 20% of forced exits in the same group in 2019.
Though effects were differentiated across industries and businesses, the U.S. economy was strongly impacted by the COVID-19 pandemic and its myriad second-order effects. One result is that CEOs saw lower total direct compensation (TDC) than otherwise expected in 2020, with reduced salaries, bonuses and other compensation, leading to median TDC of $12 million for the year among Equilar 500 companies, a decline of 1.9%.
Performance targets set prepandemic were rendered unreachable for many companies, contributing to reduced incentive payouts and lower pay delivered overall.
As companies felt the impacts of the public health crisis, many CEOs voluntarily took salary cuts to demonstrate commitment to their employees as they faced the difficult prospect of furloughs and layoffs. Salaries fell from $1.2 million in 2019 to just under $1.2 million at median in 2020. Cash bonuses also fell 2.9% from $2.4 million to $2.3 million in 2020, enough to bring median total compensation down slightly despite the median value of stock awards increasing by 6.1% in 2020, from $6 million to $6.4 million.
Another outcome that may be partly attributable to COVID-19 disruption is a slight cooling in CEO departures in 2020, which fell to a total of 70, from 78 and 80 in the two prior years. Research by executive recruiting firm Spencer Stuart indicates that in times of economic uncertainty, boards tend to de-prioritize CEO transitions, opting instead to maintain leadership stability to the degree possible. Interestingly, despite strong economic growth in many sectors during 2021, CEO departures in the Equilar 500 continued to decline, with 50 transitions announced during the year, back in line with typical ranges over the past decade. On the surface, this runs counter to the previously mentioned tendency to opt for stability in times of uncertainty. However, attrition in the broader economy, and in certain industries like financial services, drug discovery and enterprise software, remained very active through 2021 to present, according to George Paulin, a Partner at Meridian Compensation Partners.
In the first installment of the Equilar Podcast Series this summer, Paulin cited a number of reasons for increased levels of attrition in recent years. Two contributors were economic growth and demographics, with aging leaders from the Baby Boomer generation feeling secure retiring in a strong economy. Disconnection from regular work interaction as a result of COVID-19, technological change and digitization, and growing investment in new companies, IPOs and SPACs competing with traditional public companies were additional drivers.
While Equilar 500 CEO outcomes in 2021 may look like a return to recent historical trajectories for compensation and turnover, vast uncertainty remains as a result of the ongoing public health crisis, with developments during the first half of 2022 only exacerbating matters. Volatile equity prices, runaway inflation, the Ukraine conflict, supply chain disruptions, rising COVID-19 case numbers, fears of a prolonged recession and a busy SEC rulemaking schedule this year cast serious doubt on the prospect of any period of long-term stability. Paulin emphasized that while economic growth conditions have weakened in 2022, attracting and retaining high performers continues to be a top concern for human capital planners.
While economic growth conditions have weakened in 2022, attracting and retaining high performers continues to be a top concern for human capital planners.
As uncertainty and intense competition for executive talent have come to feel like a new norm for planners in the past several years, companies are adjusting compensation and retention strategies to keep up in the shifting environment. One area particularly affected is long-term compensation. “High performers generally aren’t retained by unvested equity anymore,” states Paulin. With equity buyouts now the commonly accepted practice in executive hiring situations, he highlights instead the importance of business strategy, culture and engagement in driving retention.
Paulin also noted that many companies are rethinking the leverage in their long-term plans, looking for ways to structure pay packages to compete with more highly leveraged pay opportunities in IPOs and SPACs. Companies are also granting special awards outside of their annual long-term plans at a higher frequency, and Paulin expects to see more of such awards in future years as companies look for ways to retain or more deeply engage key performers. Along similar lines, greater leverage is being applied to performance share awards with growing valuations, and larger time-based grants are being made to balance the greater risk in performance shares.
Paulin also shared some advice for human capital planners heading into the end of 2022. “The biggest retention concern is keeping the highest performers engaged … As growth cools off and some of these other factors take away the intensity of what we were experiencing [in the executive labor market] last year and the beginning of this year, don’t take your eye off the ball because of that.”
Shane Carroll is Associate Editor of C-Suite and Director of Governance Insights at Equilar.