CAN CEO PAY KEEP RISING?
Typical compensation now tops $12.3M
The typical pay package for CEOs at the biggest U.S. companies topped $12.3 million last year, and the gap between the boss and their workforces widened further, according to AP’s annual survey of executive compensation.
Median pay for CEOs in the survey climbed 4.1 percent last year. For the typical worker at their companies, it rose 3.2 percent. It would take two lifetimes for the typical employee at most S&P 500 companies to make what their CEO did, or 169 years, according to data analyzed by Equilar for The AP.
For the first time since the AP’s annual pay survey began in 2011, a woman is at the top of the list: Lisa Su of Advanced Micro Devices. She had compensation valued at $58.5 million after guiding her company’s stock to the best performance in the S&P 500 for two straight years.
Otherwise, the top of the pay rankings again includes several familiar names from the media and entertainment industries, such as Walt Disney’s Robert Iger and Netflix’s Reed Hastings.
CEOs such as Alphabet’s Sundar Pichai and Intel’s Robert Swan had packages that were valued even higher that Su’s, but were excluded because the AP’s survey looks only at S&P 500 bosses who have been in the job for at least two years, in part to avoid distortions caused by sign-on bonuses.
Of course, the survey’s results are from before the coronavirus pandemic upended everything. Now, there’s a chance the outbreak will do what rising anger about income inequality has not in recent years: pull executive compensation lower.
Hundreds of CEOs across the country have already said they’ll forgo some or all of their salary. And the turmoil in the stock market and the global economy could make it tougher for CEOs to meet performance targets and threaten the stock awards and bonuses that make up the majority of their pay.
Boards of directors could make changes to compensation plans to help shield CEOs from the damage caused by a recession that no one saw coming. Consultants and investors say such adjustments are already being considered in some boardrooms.
Executive pay was already under greater scrutiny among those
ultimately in charge of how much CEOs get paid: investors who own the company’s stock and elect the directors to the board.
“I think there has been a growing sense — not by all, but a growing portion of institutional investors — that CEOs are overpaid,” said Amy Borrus, deputy director of the Council of Institutional Investors. “It’s not so much that they’re overpaid but that it’s out of whack with corporate performance“
She said pay packages are often built on goals set by boards that are difficult for investors to understand and that don’t always incentivize performance.
The AP’s compensation study included pay data for 329 CEOs at S&P 500 companies who have served at least two full fiscal years
at their companies, which filed proxy statements between Jan. 1 and April 30.
CEOs in the AP’s survey had a median compensation valued at $12.3 million last year, which means half made more and half made less. Besides salary and cash bonuses, that includes stock awards and option grants that CEOs will get the full value of only if the company’s stock price rises in the future.
In many cases, big chunks of the compensation were for stock and options that companies granted their CEOs in 2019 for their performance in 2018 and earlier years.
The 4.1 percent rise in median pay was a slowdown for S&P 500 CEOs, who had seen their pay jump 7.2 percent the year before and by even more in earlier years. Much of the slowdown was because of a drop in how much cash the CEOs got for hitting various performance targets.
At Eastman Chemical, for example, the value of CEO Mark Costa’s compensation dropped 11 percent to $14 million last year, according to the survey, in part because he fell short in some performance metrics set by the board of directors.
Eastman’s board said Costa exceeded the goals set for “growth and innovation” in 2019, but he only partially met the targets for how much cash the company generated, as well as for employee safety and other measures. He received $377,000 in what the company calls its “unit performance plan,” down from the $1.5 million he got from the plan a year earlier.
The slowdown in CEO pay across the S&P 500 is partly due to the increased voice investors have gotten on the subject, shareholder advocates say. It’s been nearly a decade since the U.S. government began requiring companies give their investors a “Say on Pay” at
annual meetings, allowing them a non-binding up-or-down vote on executive compensation.
Shareholders are giving most companies an overwhelming thumbs up. But the scrutiny has helped curb some of the most egregious practices in recent years, such as companies paying the equivalent of CEOs’ income taxes, said Rosanna Landis Weaver, program manager of executive compensation at As You Sow, a shareholder advocacy group.
“We might find out just how well the system works next year,” she said. “I fully expect some companies will keep their targets and metrics the same, and there will be fewer bonuses.”
Because companies have tied more of their CEOs’ compensation to corporate performance — and because many boards set their financial goals early this year, before everyone fully appreciated how badly the COVID-19 outbreak
would wreck the global economy — many CEOs are likely to fall short of all the pay they could have been in line for.
The S&P 500 lost as much as a third of its value earlier this year, when worries about the recession were at their peak. Corporate profits, another key measure for CEO pay, are also expected to crater. Across the S&P 500, earnings per share will likely sink 33 percent this year, strategists at Goldman Sachs say.
The economy’s deep freeze has caused massive layoffs and furloughs, and nearly 39 million U.S. workers have filed for unemployment benefits in the two months since the outbreak took hold in the country. It’s just one of the ways that companies are preserving cash to survive the sudden recession, along with suspending matches to workers’ 401(k) plans and cutting dividend payouts to shareholders.