9/21/2023
Market Conditions Fail to Dent High CEO Pay, Finds Research
IR Magazine (09/21/23) Roach, Garnet
Across the United States, over 70% of chief executives took home at least their target remuneration in 2022 – a figure that is largely unchanged over a five-year research period from 2018 to 2022. Median payouts for CEO annual incentives at S&P 500 firms in 2022 were $1.41 million. Looking at CEO pay across the S&P 1500 between 2018 and 2022, researchers discovered that, despite major market volatility during the study period, payout rates were consistently above the 50% to 60% range "considered best practice by consultants, academics and practitioners." "The findings call into question whether boards and compensation committees are setting sufficiently rigorous targets for their CEOs," comments ISS, which published the findings, in a statement. "Despite significant variability in economic conditions over the last five years, the percentage of CEOs achieving payouts at or above target has remained relatively unchanged," according to the report authors. Although the 2022 median is down from 2021’s $1.75 million as companies rebounded from a host of pandemic-related challenges, ISS says that despite the difference in absolute dollars, all market caps across the S&P 1500 have realized CEO pay growth. "Company size significantly impacts the size of payouts, with S&P 500 companies reporting a median of $2.3 million in incentive payouts last year, compared with $925,000 for the S&P 600. But each S&P 1500 market cap grouping has exhibited similar payout growth, with median payouts rising by 19% since 2018," states ISS in the report. "The trend of CEOs receiving at or above-target payouts, while consistent with results in recent years, may raise concern with investors in the context of ongoing recession fears and a challenging operating environment for many companies," says Roy Saliba, managing director at ISS Corporate Solutions. "When payout rates consistently stray beyond the range of what is considered best practice, it often indicates an underlying issue with the design of the performance plan, whether with the metric selection, the formulation of the payout curve or goals that are either too easy or too hard to achieve." Referencing best practice related to incentive payouts, ISS notes that: threshold payouts should be reached eight to nine times out of every 10 years, or an 80% to 90% achievement rate; target payouts should be reached five to six times out of every 10 years, or 50% to 60%; and maximum payouts should be reached once or twice every decade, a 10% to 20% rate. This was not realized across the S&P 1500 during the research period. Rather, from 2018 to 2022, more than 90% of CEOs with an annual incentive award got a payout of at least threshold – the minimum payout that can be reached. "The exception is 2020, when the unexpected pandemic wreaked havoc on many companies’ incentive plans. Even then, only 12% of companies reported no payout on their short-term incentive plans," according to researchers. "At the time, many companies resorted to award modifications, goal changes and discretionary adjustments to account for external circumstances. That led to lower, but not drastically different, payout levels compared with other recent years." The ISS report is titled "Annual incentive payouts: Are target goals too modest?"
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