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CEO pay has been climbing at a brisk pace for decades, with current economic conditions or other external factors often having little effect on paydays for many top executives.
A new Willis Towers Watson study, however, found pay growth for chief executives at S&P 1500 companies slowed down last year, as organizations continued to stare down pandemic-related challenges.
For example, the study saw smaller increases in both target and earned total CEO pay in 2020 — increasing at the median by 4.7% and 3.9%, respectively. These figures represent a slower rate of increase than the 6% increase in target pay and the 5.5% jump in earned pay observed last year, signifying the lowest percentages since the 2015–2016 cycle, according to Willis Towers Watson.
Such modest growth in target pay was expected in the midst of 2020’s uncertain economic climate, according to the global advisory firm, which also saw “notable declines” in earned annual bonuses as well as sizable fluctuation in earned long-term incentives among CEOs.
Data gathered as part of Willis Towers Watson’s Global Executive Compensation Analysis Team (GECAT)’s most recent annual review of S&P 1500 CEO pay showed a 9% decrease in earned long-term incentives for S&P 600 CEOs last year, compared to a nearly 7% spike in 2019. The increase in earned long-term incentives for CEOs at the largest companies dropped from 23.5% in 2019 to just under 15% in 2020, the team found.
Overall, these findings confirmed most of the team’s expectations going into the study, said Don Delves, a managing director and North America practice leader, executive compensation, at Willis Towers Watson.
“We kept reading inflammatory articles about huge CEO paydays in spite of employee layoffs and furloughs,” Delves said. “But those articles typically cite one or two examples that appeared to be outliers. In our experience advising boards, that is not what we witnessed.”
In fact, Delves and Willis Towers Watson see “much more moderate pay actions with low or modest incentive payouts at most companies,” he said.
“And our study confirmed this, [in the form of] modest pay increases for CEOs, with almost all of the increase driven by performance. Our view was that the U.S. executive pay and governance system was seriously stressed, but held up well under pressure and delivered appropriate results.”
Looking at the executive pay picture for the year ahead, Delves sees many pandemic-related executive pay issues lingering.
“Long-term performance incentive cycles that include 2020 and will pay out in early 2022 may have low or zero payouts. Companies that will have two low or zero long-term incentive plan (LTIP) payout cycles in a row may decide to take some kind of corrective action,” predicted Delves. “Most will probably not make adjustments to these in-flight cycles, which was also the case last year. However, boards may decide to increase grant levels for 2022.”
Delves identified a handful of other executive compensation trends to keep an eye on as the calendar inches closer toward the new year.
“With a greater U.S. focus on diversity, equity and inclusion, ESG governance and inclusion in incentives is another key executive pay issue we see as we move into 2022,” he said, noting that other non-financial metrics might arise as multiple stakeholders are taken into consideration.
“We expect board compensation committees will continue to expand their remit,” added Delves, “addressing broader ESG issues and especially broader employee pay and well-being.”
Risk and variability in performance will be an ongoing concern for organizations as well, “as companies realize that one-in-a-hundred-year events are becoming a common occurrence.”
The impact of inflation should be top-of-mind for compensation leaders at the moment, he said. The problem, however, “is that backward-looking pay data doesn’t tell us what we need to know in an inflationary market.”
Delves described the current market as one of “fairly significant” wage and price inflation and the potential impact this moment could have on compensation plans going forward.
“We see it every day. We have nice-sounding phrases for it, like ‘the war for talent,’ ‘the great resignation,’ ‘the great retention,’ ‘the turnover tsunami’ and so on.’
“But I believe this is the result of a significant round of inflation working its way through the system in some pronounced spikes, which will soon morph into one big system-wide spike or permanent increase,” he said. “Let’s just hope it doesn’t last for many years.”
Relevant WorldatWork Resources
- Course: Executive Compensation Immersion Program
- Course: Advanced Concepts in Executive Compensation
- Certification: Certified Executive Compensation Professional