Pay growth for the top executive role at S&P 1500 companies slowed in 2020, as companies faced immense challenges presented by the COVID-19 pandemic. This year’s study revealed smaller increases in both target and earned total CEO pay in 2020, increasing at the median by 4.7% and 3.9%, respectively. That represents a slower rate of increase than the 6% increase in target pay and 5.5% increase in earned pay observed last year and the lowest results since the 2015 – 2016 cycle. Modest growth in target pay was expected given the economic climate in 2020; however, we observed notable declines in earned annual bonuses as well as significant fluctuation in earned long-term incentives (LTI), particularly when analyzed by company size. The struggle to achieve or surpass operating goal measures led to another drop in overall annual bonus payouts, with the average bonus falling to 99% of target, down from 102% of target for 2019 performance. By contrast, earned LTI values for mid- and small-cap CEOs experienced a seesaw effect in the past two years; S&P 400 CEOs had a 2% decrease in 2019, followed by a 14.7% increase this year, a swing of nearly 17 percentage points. Conversely, our data showed a 9% decrease in earned LTI for S&P 600 CEOs in 2020 compared with a 6.8% increase in the prior year. The increase in earned LTI for CEOs at the largest companies fell from 23.5% in 2019 to 14.9% in 2020.
These findings were identified by Willis Towers Watson’s Global Executive Compensation Analysis Team (GECAT) in its annual review of S&P 1500 CEO pay. Other key findings highlighting the drivers of CEO pay include:
- Target pay: Large-cap CEOs saw the biggest increase in target pay, which rose 5.4% at the median, while S&P 600 small-cap CEO pay grew just 3.7%. Mid-cap CEO pay also grew modestly in 2020, increasing 4.4% at the median. The majority of S&P 1500 CEO pay is delivered through LTI and continues to increase, now comprising 61% of the pay mix in 2020. One-fifth (20%) of pay is derived from annual bonuses, with the remainder delivered through salary. These findings vary according to company size, with larger companies generally granting higher values of LTI within the pay mix.
- Base salary: Base salaries remained flat at the median for the first time in our study, as nearly half (47.5%) of S&P 1500 CEOs received no increase in 2020, up from 42.8% in the prior year. S&P 400 CEOs received a 2% increase at the median, while small-cap CEOs received just a 1% salary bump. Large-cap CEOs aligned with the overall S&P 1500 to show no change at the median. Only the health care, utilities, materials and consumer staples sectors showed any salary increase at the median in 2020. The lack of growth in base salary is a departure from the typical 2% to 3% increases we’ve observed the past several years and is likely a by-product of pandemic-related salary freezes and reductions through the end of 2020.
- Annual bonus: Bonus targets dipped slightly in 2020, increasing 2.5% at the median, a drop from the typical 3% growth we’ve observed in each of the past few years. Specifically, fewer companies increased bonus targets, and those that made adjustments did so in smaller increments. Just 18% of companies raised their target bonus percentage, with a median increase of 11 percentage points. This reflects the fewest number of companies making a change and the smallest level of adjustment since 2017, when the same number of companies adjusted bonus targets with a median increase of 10 percentage points. One-fifth of CEOs received a bonus payout at or below 50% of target, driving the overall lower average bonus payout down in 2020.
- Long-term incentives: Target LTI pay grew 5.1% at the median for S&P 1500 CEOs, down from the 7.1% growth observed in the prior year. The LTI value mix did not change significantly in 2020. Performance plan awards comprised over half (51%) of LTI value, with over one-third (34%) delivered through time-vested restricted stock and the remainder (15%) provided through stock options. Stock options continue to be found in fewer LTI programs, as prevalence dropped from 36% to 34% in 2020. Conversely, time-vested restricted stock was issued to 74% of S&P 1500 CEOs, up from 71% in the prior year. This increase in prevalence of time-vested restricted stock grants is notable as a possible pandemic side effect because it affords companies more control over the value delivered as well as a built-in retention mechanism, which may have further encouraged companies to substitute restricted shares for stock options in 2020. Long-term performance award usage remained steady at 78% last year. The average payout of shares from performance awards granted and completed during the 2018 – 2020 period was 107% of target, down from 112% of target for the 2017 – 2019 period. The average realized value from these payouts was 155% of the targeted value, a drop from 175% of targeted value for the 2017 – 2019 period, which may also reflect stock price growth in 2018 – 2020 that did not match levels reached in the previous cycle.
- CEO pay ratio: The median CEO pay ratio in 2020 at S&P 1500 companies in our study was 102:1. The gap at S&P 500 companies widened the most over the past three years, jumping 7.4% at the median from 162:1 in 2018 to 174:1 in 2020. Interestingly, this year the median pay ratio for small-cap CEOs regressed back to its 2018 level of 57:1 following an increase to 63:1 in 2019. Pay ratio levels vary considerably when examined by industry, as results are affected by sectors with a significant portion of the workforce with lower pay.
- Earned pay: Total earned pay for S&P 400 CEOs grew 7.6% at the median, up from last year’s relatively flat change of 0.2%. Earned pay for large-cap CEOs grew by 8.6%, a slower rate of increase compared with 2019’s 13.1% rise in pay. S&P 600 CEO earned pay did not increase at the median in 2020, following a 4.8% increase in 2019. Earned LTI is typically the driver of earned pay results. In 2020, sizable shifts in option exercises had an impact on earned LTI growth, particularly for mid- and small-cap CEOs. Nearly one-third (32%) of S&P 400 CEOs exercised options in 2020, up from 28% in the prior year, whereas the number of S&P 600 CEOs choosing to do so fell from 25% to 20%. Further, the average number of options exercised as well as the value earned from exercised options each increased for CEOs of mid-cap companies and declined for those at small-cap companies.
Companies took a cautious approach in determining pay adjustments in 2020, as they operated under a complicated environment at the outset of COVID-19. Pay targets and base salary growth were dialed back to levels not seen since the mid-2010s. The deleterious effect of the pandemic on financial performance and market returns ultimately affected companies to a greater or lesser extent, but on the whole, average earned bonus for 2020 performance dipped below target level, and earned LTI values from prior LTI grants grew slower for large-cap CEOs and declined significantly for small-cap CEOs over 2019.
While uncertainty in the economic and corporate governance landscapes lingers, performance-based awards will likely continue to be the primary element of CEO compensation programs because they offer accountability from a pay-for-performance perspective; however, the question remains whether prevalence of stock option grants will continue to decline and the use of time-vested restricted stock grants will continue to increase.
