Top 300 CEO Pay Study: The Post-Pandemic Evolution of Executive Pay

CEOs within the largest 300 publicly traded companies continued to see pay rise, albeit at a more reasonable pace in 2022. After record-setting market performance in 2021, where top 300 CEOs benefited from double-digit percentage pay increases despite persistent pandemic headwinds, companies exercised more caution in 2022 with respect to executive pay decisions as median target total direct compensation rose by a modest pace of 4.6% to $15.5M. While total cash compensation was slightly down (-1.6%) from the year prior, CEOs saw a median LTI grant value increase of over 7% from 2021. Boards continued to have more appetite for increasing executive pay via LTI to strengthen long-term shareholder alignment, performance orientation, and retention as companies began to prepare for life post-pandemic. As businesses begin to move away from the days of pandemic uncertainty, so will their pay programs with a renewed focus on money-making and strategic priorities, objectivity, and financial rigor, which we have begun to see in 2023.

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While CEO salaries increased slightly at median year-over-year (2.3%), bonuses decreased by nearly 6% - but that’s coming off a banner year where CEOs saw an average bonus outcome of 150%+ of target opportunity. Despite volatile market conditions during 2022, CEOs continued to realize above-target bonus payouts (135% of target on average).

Exhibit 1. Median Top 300 CEO Pay & Year-Over-Year ? (2022 vs. 2021)

This is likely attributable to incentive design constructs that have continued to be structured within the context of uncertainty, allowing executives to be in-the-money with respect to payout probabilities. That means continued emphasis on qualitative goals or other foundational successes that are worth paying for rather than stretching financial metrics within a business-as-usual context. However, shareholders have begun calling for a return to pre-pandemic incentive practices that require enhanced performance rigor accompanied by core financial and operational metrics that are well understood by the market and correlate with value creation. Despite CEOs still getting paid handsomely in 2022, there is evidence of a slowdown exhibited by the distribution of CEOs experiencing year-over-year changes in bonus outcomes and total direct compensation. While more than three-quarters of the top 300 CEOs saw pay rise in 2021, just under 60% saw the same in 2022. Furthermore, the number of CEOs that earned an above-target bonus in 2022 declined by 10% year-over-year. We expect to see this trend continue as Boards and shareholders continue to apply pressure for sustained performance and while ratcheting up performance expectations to execute new post-pandemic business strategies.

Exhibit 2. 10-Year Top 300 CEO TDC Trend

After a long run of long-term performance-based awards holding steady at ~55% of the overall LTI mix, the emphasis on performance awards spiked in 2022, peaking at the highest weighting we have seen (60% on average). After years of stagnant LTI mix, the emphasis has shifted once again toward performance awards, at the expense of stock options (now at an average weighting of 15%). Time-vested equity awards are holding steady at an average weighting of 25%. It is too soon to tell whether this shift in LTI mix is a more permanent or a temporary move – companies may have over indexed on PSUs in 2022 to appease shareholders and ISS after a year where companies were willing to lose ISS in order to keep executives whole during the pandemic.

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While companies have made progress toward alignment of pay and performance, some “pandemic pay” decisions are reversing that course, at least temporarily. An implication of “pandemic pay” constructs is the dilutive impact of economic performance on pay outcomes – we saw this phenomenon emerge following the financial crisis in 2008 as well, where less differential in bonus and LTI outcomes were demonstrated between lower, middle, and top quartile performers. For the first time in our study, realized LTI differential between bottom and top quartile TSR performers was modest, while realized LTI outcomes were very similar among 2nd-to-top quartile performers (i.e., CEOs within companies that gained a median TSR of nearly 20% realized a similar LTI quantum as those that gained a median TSR of more than double that). In addition, bonus outcomes were also quite similar between 3rd and 4th quartile EBITDA performers. Both outcomes likely resulted from some diversifying of bonus metrics away from pure profitability and less-leveraged LTI constructs over the past two years as companies emphasized retention over long-term performance alignment.

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Going forward, we expect pay decisions and designs to be carefully managed as markets continue to exhibit volatility. FY’23 CEO pay will likely stay at a moderate pace as investors demand sustainable and inclusive growth. We expect the mix of performance to become more diverse than ever as board and shareholder expectations adapt to life after the pandemic and align with the still-emerging focus on ESG. Companies are currently re-establishing their footing in a post-pandemic environment and the roadmap to a full recovery may not be clearly charted out yet. So, while it is easy to revert to some pre-pandemic pay practices, simply doing what was done in 2019 will no longer be the best answer. New pay paradigms that are best for your business will begin to emerge and become a common theme across industries.

Median Year-Over-Year Top 300 CEO TDC ? (2022 vs. 2021) – By Industry: