CEO pay has risen at an unprecedented pace in recent times.
Since 1978, those who sit at the top spot in many of the world’s largest and most consistently profitable companies have enjoyed a 1,460% increase in salary. While some believe that CEO pay has gotten out of control, others believe it is well deserved.
A Breakdown of Recent Shifts in CEO Pay
Many things have changed in regard to CEO pay in recent years. Because of worldwide turmoil and uncertainty, many companies have simply been trying to keep their heads above water while simultaneously working to keep all shareholders happy.
In response to corporate upheaval, many of the top companies pivoted their business strategies — including the way they compensate their chief executive officers. Here is a rundown of how and why companies have moved away from traditional executive compensation models toward methods outside of the norm.
Double-Digit Percentage Pay Increases in 2021
CEOs at 350 of the largest publicly owned corporations experienced an increase in compensation of around 30.3% between 2019 and 2021. Much of this astronomical increase in pay can be tied to record stock market performance, during which some companies experienced all-time highs.
This was also a period of extreme economic uncertainty.
CEOs worked very hard to keep their companies from derailing amidst:
- Societal panic
- Civic unrest
- Rapid changes in consumer behavior
- Massive supply chain disruptions.
Consequently, boards wanted to ensure that CEOs were compensated for their performance under immense pressure.
More Modest Increases as of 2022
Even as society began making a comeback in 2022, the stock market turned south, sparking serious shareholder concerns about the overall profit potential at many of the world’s top companies.
As a result, CEOs saw a much more modest increase in pay in 2022. Total direct compensation rose by just 4.6%, with a long-term incentive increase of just 7%. Bonuses and total cash compensation were both down for the year.
An Emphasis on Qualitative Goals
One of the largest reasons that CEO pay continues to increase is that many boards began moving away from evaluating executives on performance in favor of using more qualitative metrics and goals.
At a time when value creation became extremely difficult, boards responded by shifting the criteria for pay increases. While CEOs may not have made as many contributions to increasing revenue, many of them succeeded in positively impacting more foundational company issues. This, board members thought, warranted pay increases.
Pay In Response to Retention Concerns
One important reason for the astronomical pay increases — a reason that cannot be overlooked — is the need for companies to figure out how to retain CEOs.
Many CEOs vacated their positions in the last few years amid intense pressure and a lack of fit for the job demands. Constantly having to find new leadership can be costly for companies. Consequently, compensating CEOs well in the hopes that they would stay became the strategy of choice for many corporations.
What You Can Expect in the Future
As society has begun moving away from the extremes of the last few years, the business landscape has been evolving in its own ways as well.
While some aspects of CEO compensation might never return to the previous “normal” or prior standards, boards cannot ignore calls to:
- Shift away from qualitative analysis for CEO pay.
- Get back to business as usual.
Better Alignment of Pay and Performance
Undoubtedly, many board members want to get back to ensuring CEOs get the pay they truly deserve. In their eyes, this should be based on profit and value creation. Many have called for a return to the corporate world’s previous compensation method of paying based on concrete performance methods.
Whether a CEO creates value for shareholders should be the primary question when the board is considering pay raises.
A Decrease in Pay Raises and Above-Target Bonuses
As a result of the shift back to metrics-based evaluation, CEOs should expect to see more modest increases in pay and above-target bonuses. While there are a number of reasons for the corporate world to make this shift, most of them stem from a need for boards to see more dedication to long-term growth, heightened performance, and new business ideas.
Greater Diversity in Pay-for-Performance Metrics
Still, even with a serious focus on revenue and value creation, CEOs should expect to be evaluated on a wider range of performance metrics. As CEO retention continues to remain an issue (more CEOs left their post in 2022 and 2023 than in previous years), a commitment to long-term outlooks over short-term performance will be a plus. Other metrics, such as those related to sustainability, will also come into play.
An All-Around Focus on True Sustainability Practices
Focusing on environmental, social, and governance (ESG) factors continues to remain a hot-button issue, especially among younger investors. As the concept of ESG matures and companies develop performance and evaluation standards around what was once a more abstract concept, CEOs will begin to see more ESG-contingent performance evaluations.
Many Gen Z investors want to know that companies are growing sustainably, and that includes CEO pay. As a result, these new performance metrics will only continue to gain importance in the coming years.
The New Definition of “Pay for Performance”
Since 2019, many CEOs have enjoyed double-digit increases in pay. Much of this was due to economic uncertainty and concerns over CEO retention. Boards shifted away from pure performance metrics and began evaluating CEOs much more quantitatively.
As a result, many of them obtained better evaluations and subsequently significant pay increases, even in the face of declining stocks and lower revenue targets.
For the future, boards are calling for a comeback in terms of performance-based pay increases. However, don’t expect the evaluation to look exactly as it did in 2019. Instead, many boards will move to diversify the way CEOs are evaluated, taking into consideration the upcoming generation’s values. Moving forward, CEOs will be expected to have a growth mindset that includes both revenue and sustainability.
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