2011 CEO Pay Trends in the S&P 500 – Report & Reactions
Equilar has just released their latest report, on CEO pay trends in the S&P 500… and with the report the findings quoted below.
“After pay declines in 2008 and 2009, CEOs saw their total compensation rise 28.2% from 2009 to 2010, to a median of $9 million. A few other findings:
- Bonuses were the component of compensation that saw the most growth in 2010, with a 43.3% rise. The median bonus was $2.15 million. 85.1% of CEOs received an annual bonus payout in 2010, compared to 73.6% in 2009.
- Options are still the most common equity vehicle, but performance shares and restricted stock are on the rise.
- Both stock-based awards and bonus payouts became a larger part of the pay mix, at 38.2% and 27.2%, respectively, of total 2010 pay.”
Statistics like this are misleading without proper context. In 2007, the year before the recession/stock market crash, the median S&P 500 CEO had reported total compensation of $8.7 million (i.e., with equity awards reported at expected value, not actual value). That median declined to $8.0 million in 2008 as the recession began in many industries and $7.0 million in 2009 as the full force of the poor economy hit executive bonuses and stock grants. The $9.0 million reported for 2010 does represent a 28% increase from the low, but only a 3% increase over 3 years from the pre-recession value.
In order to properly understand trends, you need to look what is happening with each component over time. What actually happened was that 2008 equity grants were made in early 2008, before the recessions impact was felt – thus the median change was rather small and positive. The big change in 2008 was cash bonuses, which were down significantly (22%), although the impact varied by industry. In 2009, bonuses were up slightly (8.5%) reflecting largely performance versus diminished expectations. Equity awards for 2009 were made at or near the trough of the market – down 18% for options and about flat for stock awards. But this too needs to be considered in context. Many companies replaced option grants with full value share awards (i.e., restricted
stock or performance shares), thus the declining price was offset by increased prevalence producing a flat median award. The decline in the stock market value (40% – 50%) was somewhat masked by the fact that interest rates declined in 2009 and volatility increased. These factors increase the value of option awards as a percentage of market price, so that the reported decline in option values did not fall as fast as stock prices. The decline in both types of awards was also somewhat masked by the prevalent practice of granting a fixed value of LTI award (e.g., 300% of salary) despite the nonsensical effect this has of increasing share awards when stock prices decline and decreasing them when stock prices go up. In 2010, we saw the biggest change in pay in cash bonuses as profits recovered to 2007 levels. Stock and option awards were up sharply (39% and 16% respectively) as stock prices improved 40% to 50% over awards made at the same time in 2009.
The bottom line is that executive pay performed exactly as it should over this period – flat from peak to peak with significant declines in the trough of the recession.
– Paul McConnell is a Managing Director of Board Advisory, LLC