Chief executive officers at the largest U.S. corporations saw their total compensation increase last year at the fastest pace since 2014, a new analysis of corporate proxy disclosures shows.
Significantly larger annual incentive payouts and higher values for long-term incentives drove big increases in total pay, according to analysts at consultancy WTW.
They found that total pay for CEOs at large publicly traded companies jumped 15.7 percent in 2021, sharply higher than the 3.2 percent median increase in 2020. It was the largest pay increase for corporate CEOs since 2014, when total pay increased around 16 percent.
In comparison, wages and salaries rose 5 percent for private industry workers in the U.S. in 2021, up from 2.8 percent in 2020, the Bureau of Labor Statistics reported in January 2022.
Total CEO pay, as reported in summary compensation tables in company proxy statements, includes base salary, annual and long-term cash bonuses, the grant-date value of long-term incentives (such as stock options, restricted stock and long-term performance shares), the value of executive perks, earnings from deferred compensation, and the change in value of executive pensions.
The findings, summarized in the slides from a June WTW webcast, drew data from 500 companies in the S&P 1500 (roughly, the 1,500 biggest U.S. corporations) that filed proxies disclosing 2021 pay by the end of April. The disclosures show that although CEO salaries (base pay) increased just 2 percent in 2021, compared with a 1.1 percent increase in 2020, incentive compensation rose sharply:
- Annual bonus payouts soared 39.3 percent last year, compared with a 6.1 percent decline in 2020.
- More companies (82 percent) paid annual bonuses at or above target levels, compared with 45 percent in 2020.
- Annual bonuses averaged 145 percent of target in 2021, up from 97 percent in 2020.
- The value of target long-term incentives jumped 9.1 percent in 2021, compared with a 5.5 percent increase at the median in 2020.
"Last year was a bounce-back year for CEO compensation as well as a good year financially for many companies and shareholders," as revenue growth, earnings and returns to shareholders bounced back from COVID-19 pandemic lows, said Don Delves, North America practice leader of executive compensation at WTW.
The 12th year for mandatory say-on-pay shareholder votes is showing a relatively positive response to executive pay programs in general, but with targeted opposition to above-market pay packages driven by one-time awards, WTW reported.
Companies Add ESG Metrics to Incentive Plans
A separate WTW analysis found growing interest in linking executive incentive awards to environmental, social and governance (ESG) measures. Out of 310 S&P 500 companies in the study, 92 added a new ESG measure to their 2021 or 2022 annual incentive plans, including 42 that did not previously have any ESG measures.
Additionally, 22 companies added an ESG metric to their long-term incentive plans. All but one of these companies did not previously use an ESG measure in their long-term plans.
"Responding to stakeholder concerns, more companies are tying incentive award goals to achieving various ESG initiatives, such as net-zero carbon emission commitments or inclusion and diversity recruitment goals," said Kenneth Kuk, senior director of work and rewards at WTW. "We expect this trend to continue as part of companies' broader efforts related to risk management, brand value enhancement, and recruiting and retention."
Some, however, oppose using of ESG metrics for businesses. "It's time to reconsider the idea that the economy will benefit if corporations sacrifice their bottom lines in favor of environmental, social and governance considerations," argued David R. Henderson, a research fellow with Stanford University's Hoover Institution, and Marc Joffe, a senior policy analyst with the Reason Foundation.
Earlier this year, researchers at advisory firm PricewaterhouseCoopers reported that while a majority of S&P 500 companies are now making use of ESG metrics, "that trend doesn't hold true for smaller companies," and that fewer than 10 percent of companies within a broader index of 3,000 publicly traded companies (excluding those companies that make up the S&P 500) were using ESG metrics in their executive compensation plans. For now, the practice "is largely concentrated among large-cap companies and among companies within certain industries," the researchers noted.
SEC Working Toward Executive Pay 'Clawback' Rule
In June, the U.S. Securities and Exchange Commission (SEC) for the second time extended the comment period for its proposed rule on recovery of erroneously awarded compensation under the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in 2010.
Dodd-Frank requires publicly traded companies to adopt provisions for recovering incentive-based compensation that was paid to executives during the prior three years if financial restatements subsequently show those payouts were based on faulty reporting of the company's financial performance. The SEC initially proposed the clawback rules in July 2015.
The SEC is "signaling that final rules will follow the end of this third comment period on the proposal," wrote attorneys at law firm Debevoise & Plimpton on June 17. "After the SEC's final rules are issued, any issuer that has already adopted compensation recovery policies should examine its existing policies against the final rules to identify areas of likely change, including the applicable events that trigger clawback, the number of executives to whom the policy applies, the length of the applicable lookback window and any fault/misconduct requirements."
WTW senior directors Steve Seelig and Stephen Douglas blogged on June 23 that "the SEC still seems to be pondering some important considerations on how the rules will be crafted. However, we have seen no indication that the currently constituted SEC will decide it can ignore Congress's statutory remit to finalize these regulations."
They noted that the SEC will issue its final rule as early as later this year.
The reopened comment period will run until July 14, 2022. Comments may be submitted using the SEC's online comment form. Comments received to date can be viewed online.