Increases in total compensation for CEOs at the nation’s largest corporations fell sharply last year as weaker corporate performance led to a drop in annual bonuses paid in 2020 for 2019 performance, according to a new analysis of proxy disclosures by Willis Towers Watson (NASDAQ: WLTW), a leading global advisory, broking and solutions company.
The analysis found total earned pay for S&P 1500 CEOs increased 5.5% at the median in 2019, a sharp drop from a 13.7% jump in the previous year. The increase marks the smallest rise since a 2.2% increase in 2016. The drop was primarily felt by small- and mid-cap companies. While S&P 500 CEOs saw a 13.1% increase at the median, total pay for S&P 600 and S&P 400 CEOs grew just 4.8% and 0.2%, respectively. Earned pay includes base salary, annual and long-term cash bonuses paid, payouts under long-term performance share awards, and the value of exercised stock options and vested stock awards.
“CEO pay was a tale of two cities in 2019,” said Don Delves, managing director and North American Executive Compensation practice leader at Willis Towers Watson. “The dichotomy between company financial operating performance and share price growth led to contrasts in CEO earnings derived from annual bonuses and long-term incentive awards. This dynamic was especially evident among S&P 500 companies.”
According to the analysis, annual bonuses declined 3.2% at the median. That’s down from an increase of 5.8% the previous year. The analysis indicated the decline reflected weaker operating performance. In fact, the average annual bonus payout dropped from 114% of target in 2018 to just 102% for 2019, the lowest mark since the Great Recession.
Earned long-term incentives, the largest component of executive pay at major companies, increased 8.4% in 2019, down sharply from an increase of 13.1% in 2018. Over half (51%) of long-term incentive pay is delivered through performance plan awards, highlighting the commitment to tying pay to performance for the top executive role. This type of award is a mainstay of long-term incentive programs, granted to over three-quarters (78%) of CEOs.
CEO salaries, which have held steady the past few years, increased a modest 2.5% at the median in 2019. The COVID-19 pandemic, however, is having an impact on CEO salaries in 2020. Nearly one-fifth of companies (19%) have reduced CEO salaries this year so far in response to the COVID-19 pandemic.
“This year’s pay levels will undoubtedly be affected by temporary salary reductions and incentive program adjustments in response to the COVID-19 pandemic. Although it’s still too early to determine the full impact on CEO pay programs, we have seen some CEOs take voluntarily reductions in pay to show solidarity with workers and reflect distressed business conditions. The only certainty regarding CEO pay for 2020 is that it will vary widely across industries and organizations,” said Delves.