December 20, 2023
PvP: TSR & “Compensation Actually Paid” Correlate. . .To a Point
Compensation Advisory Partners recently analyzed disclosures made by 100 prominent companies to understand the relationship between CEO compensation and performance over a three-year period. They found that total shareholder return is correlated with executive pay, which is not too surprising since equity is a large pay component for many executives. However, the analysis highlights that other factors also affect pay:
Overall, we found that TSR performance explained 77% of CEO compensation. Although these findings indicate that performance is highly correlated with Compensation Actually Paid, once we eliminated a single outlier, the correlation was weak. To our surprise, TSR performance then explained only 18% of the variation in CEO compensation for the 99-company sample. Revenue explained 19% of the variation for this sample.
We conclude that factors other than TSR performance – for example, industry pay practices, the initial size of CEO packages using the Summary Compensation Table methodology, cash compensation levels and industry TSR performance, collectively explain the majority of the variation observed in Compensation Actually Paid.
The CAP team notes that relative Compensation Actually Paid and relative TSR performance rankings demonstrate that the relationship is sound at most companies, which should give investors comfort. That’s good news for companies too, since PvP may become a factor in say-on-pay voting decisions.
– Liz Dunshee