CEO pay climbs again, even as their stock prices don’t
Female chiefs increase in earnings, but numbers remain small
NEW YORK, May 25, (AP): CEOs at the biggest companies got a 4.5 percent pay raise last year. That’s almost double the typical American worker’s, and a lot more than investors earned from owning their stocks — a big fat zero.
The typical chief executive in the Standard & Poor’s 500 index made $10.8 million, including bonuses, stock awards and other compensation, according to a study by executive data firm Equilar for The Associated Press. That’s up from the median of $10.3 million the same group of CEOs made a year earlier.
The raise alone for median CEO pay last year, $468,449, is more than 10 times what the typical US worker makes in a year. The median full-time worker earned $809 weekly in 2015, up from $791 in 2014.
“With inflation running at less than 2 percent, why?” asks Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.
The answer is complicated. CEO pay packages now hinge on multiple layers of sometimes esoteric measurements of performance. That’s a result of corporate boards attempting to respond to years of criticism about excessiveness from Main Street America, regulators and even candidates on the presidential trail this year.
One bright spot, experts say, is the rise in the number of companies that tie CEO pay to how well their stocks perform. “There’s progress generally in aligning compensation with shareholder returns,” says Stu Dalheim, vice president of governance and advocacy at Calvert Investments, whose mutual funds look for socially and environmentally responsible companies. “But I don’t think this compensation is sustainable long term, because the US population is increasingly focused and aware of the disparity.”
More than half the median compensation of CEO pay is coming from stock and options, rather than cash. And companies are increasingly meting out those stock and option awards based on performance.
About a quarter of CEO incentive awards in the S&P 500 use total shareholder return as one of their measurements of performance. That’s more than double the percentage from three years earlier. Companies also use familiar measurements like revenue and wonkier ones like return on invested capital.
The tie to shareholder return is one reason the rise in median CEO pay last year was the second-slowest in the past five years. Of the 341 executives in this year’s pay survey, the median stock returned zero in the latest fiscal year. Last year’s 4.5 percent raise for CEOs was faster than the prior year’s 0.8 percent, but well below the 8.8 percent gain of 2013.
Even though CEO pay was up last year when stock returns were flat, big investors don’t see it as a necessarily bad thing. Many say they take a longer view, similar to how they hope to hold onto their stock investments for many years.
Capital Group, whose American Funds family of mutual funds rank among the country’s biggest, goes back at least three years when considering CEO pay versus performance, says Anne Chapman, vice president of investment operations.
The Standard & Poor’s 500 index returned a total of 53 percent in the three years through 2015.
The top-paid CEO in this past year’s survey, Expedia’s Dara Khosrowshahi, made $94.6 million last year. Most of that came from stock options, which came as part of a new five-and-a-half-year employment agreement and which vest over several years. He’ll get a chunk of those options, currently valued at $30.4 million, only if he’s able to push the stock up to an average of $170 in the run up to his contract’s end in September 2020. Expedia stock closed Tuesday at $113.17.
“This is a great example of a pay-forperformance CEO compensation plan,” says Sarah Gavin, spokeswoman for Expedia. “He’s really led the company in a turnaround, and this is about him continuing to perform and return real value customers, partners and shareholders over the next five years.”
Expedia’s stock returned 47 percent last year.
At Viacom, shareholders lost 42 percent in its latest fiscal year, which ended in September. That’s even though CEO Philippe Dauman made $54.1 million, a 22 percent raise from the prior year.
Much of Dauman’s compensation was due to a contract renewal, which included stock and options that vest over several years. Without the contract renewal, his pay would have dropped 16 percent. Viacom declined to comment. Scrutiny has been increasing on CEO pay, and many Americans say they feel left behind in the economy even though the Great Recession technically ended nearly seven years ago. This recovery has meant big gains for stocks — and for CEOs — but not so much for the typical household.
Anger is high. Nearly three quarters of Americans believe CEOs are paid an incorrect amount, relative to the average worker, according to Stanford University’s Rock Center for Corporate Governance. And that’s even though most Americans severely underestimate how much CEOs make. The typical American believes big-company CEOs average $1 million in pay.
Starting next year, companies will have to begin showing how much more their CEOs make than their typical worker. That’s when the Securities and Exchange Commission has told public companies to start disclosing the ratio of its CEO’s compensation versus its median employee. It’s the latest move by the government to shed more light on executive pay.
While many Americans say they’re angry about how much CEOs are making, the boards of directors who set their pay aren’t. They say they’re setting pay for performance, and in line with their competitors. That culture of benchmarking compensation against peers is one reason why pay keeps escalating, says the University of Delaware’s Elson.
“Everyone is being compared to everyone else, and everyone wants to be higher,” he says. “We have to get out of this Lake Wobegon and change channels and get back to a pay scheme that’s rationally based.”
For the second year in a row, female CEOs earned more than their male counterparts and received bigger raises. But only a small sliver of the largest companies are run by women, and experts say gender parity at the top remains way off.
For the second year in a row, female CEOs earned more than their male counterparts and received bigger raises. But only a small sliver of the largest companies are run by women, and experts say gender parity at the top remains way off.
The median pay for a female CEO was nearly $18 million last year, up about 13 percent from 2014. By comparison, male CEOs’ median pay was $10.5 million, up just 3 percent from a year earlier, according to an analysis by executive compensation data firm Equilar and The Associated Press.
A pay hike doesn’t tell the full story though.
The jump is largely due to the small sample size: only 17 of the 341 CEOs analyzed by Equilar and the AP were women. That means any one CEO’s compensation — Yahoo CEO Marissa Mayer’s nearly $36 million package, for example, or Mary Dillon’s 200 percent raise at Ulta — can skew the results.
Of the 10 highest paid CEOs on the list, only one was a woman: Yahoo’s Marissa Mayer, whose own position is in jeopardy amid questions about the company’s future.
The next highest-paid woman was Indra Nooyi, Chairman and CEO of PepsiCo Inc., who earned $22.2 million. General Dynamics CEO Phebe Novakovic came in third at $20.4 million. The lowest-paid female CEO on the list was Lauralee Martin of HCP, a health care real estate investment trust, whose pay package was valued at $800,000.
Women led companies in a variety of industries including technology, defense and aerospace and retail. While there are few women at the helm, they tended to be in higher paying industries or positions — making up 10 of the top 100 highest paid overall.
A recent report by S&P Global Market Intelligence highlights the gulf between words and actions in hiring women as CEOs.
“Despite all of the attention placed on increasing the number of female executives at American companies, the needle on the gender gap has hardly moved,” the report’s author, Pavle Sabic, wrote.
Sabic looked at the entire Standard & Poor’s 500 index from 2006 to 2015 and found the number of female CEOs rose from 16 to 21 — an increase of one new female CEO every two years.
“The gender gap at the CEO level ... is not closing,” he wrote.
It’s an issue of both corporate and community culture, says Serena Fong, vice president of governmental affairs at Catalyst, a nonprofit that aims to expand opportunities for women in business. She said there are conscious and unconscious biases against women in the workplace that work their way into hiring and development practices.