The Advisors' Blog

– Lynn Jokela

Throughout the year, and particularly this time of year when many companies dole out bonuses, many keep a watchful eye on CEO pay. A recent Pay Governance memo takes a look at S&P 500 CEO compensation increase trends. The memo analyzes S&P 500 CEO pay trends by focusing on CEO median total direct compensation (base salary, actual bonus paid and grant date value of long-term incentives) and finds that historical CEO pay increases have been supported by historical TSR, with annualized pay increases trailing TSR performance by 9 percentage points.  Here’s an excerpt with some projections about what might be in store:

– We expect that 2020 overall CEO actual TDC will decrease, potentially by 3-4%, due to the pandemic and weaker financial results that impacted bonus payout decisions, although this will vary based on industry performance

– We expect median CEO target pay increases in early 2021 to be in the low single digits due to some companies providing “supplemental LTI grants” for lost value for performance equity that was lost during COVID-19 – again, we’ll likely see variation with executives in industries with favorable economic conditions and higher growth seeing more significant pay increases, while those in hard-hit industries seeing flat or continued pay declines

– Individual CEO pay increases will continue to be closely tied to overall company performance and peer group compensation increases; it is notable that S&P 500 TSR was +18% in 2020, primarily driven by large-cap technology companies

– Although the study found a positive correlation between CEO annual pay increases and TSR performance, it says they’re confident the correlation isn’t as significant as that between realizable pay and TSR increases

Disney is one company that’s been hard-hit by the pandemic. During the last year, it’s been in the news as, among other things, it imposed executive pay cuts and made plans to furlough employees. A couple of weeks ago, the company filed its 2021 proxy statement and disclosed the compensation committee made “a determination to pay no executive bonuses despite achievement of certain performance metrics.”  As we start seeing more 2021 proxy statements, for companies in hard-hit industries, we’ll see whether Disney’s decision on executive bonuses turns into a trend.