CEO Pay Records a Major Increase in 2021

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Report finds bonus payouts bolstering CEO financial performance.
According to early proxy filers, 2021 was a bounce-back year for CEOs, with total pay recording an uptick of 19% and bonus payouts up nearly 75% from 2020.
Such were the findings of a recent Compensation Advisory Partners report, Early Filers: Performance Bounced Back, CEO Pay Up. The report, which reviews CEO pay levels among 50 companies with fiscal years ending between August and October 2021, also finds 90% of companies with a payout at or above targeted numbers and 50% of surveyed companies including ESG as a metric in CEO incentive plan design. Lauren Peek, principal at Compensation Advisory Partners and one of the authors of the report (along with fellow principal Joanna Czyzewski), says the significant increase in pay year over year came as a bit of a surprise.
“Our initial assumption prior to the research is that pay was going to be up from the prior year, since 2020 was so challenging because of the pandemic. But we were not anticipating such a big bounce back in performance, which led to higher actual bonus payouts.”
For 2021, performance in areas such as revenue, earnings per share and pre-tax income all saw increases. Revenue growth was up 17.1% among early filers, pre-tax income rose by 62.5% and earnings per share climbed by a whopping 71%, numbers that trump the financial performance levels of 2018-2019, prior to the onset of the coronavirus pandemic. 
In addition to inflation and price increases, Peek attributes the bounce-back to “consumers having more money to spend after a year of lockdowns and stimulus checks.”

pay_0Bonuses Play Role in CEO Financial Success

The increase in overall CEO pay came in unconventional fashion, with base salaries kept relatively flat, grant-date value of long-term incentives increasing by 11% and a 73% bump in the annual incentive payout due to overperformance relative to the goals set at the beginning of the fiscal year.
“Bonuses played a large role in the increases we saw in CEO pay," says Czyzewski. "Our report found that a majority of companies had above-target bonus payouts, which suggests that companies were uncertain about what 2021 would bring and it was reflected in the goal-setting process. But actual performance clearly exceeded expectations.”

Expect More Shareholder “Say on Pay”

With CEO salaries rising, the time is ripe for shareholders to use their “say on pay” vote this proxy season. While median shareholder support of organizational pay levels, structure and performance sat around 95% in both 2021 and 2020, the report did reveal signs of slippage. In 2020, 72% of companies received at or above 90% support, but 2021 saw a slip to 65%. Despite these results, Czyzewski sees the overall say-on-pay results as a positive for a majority of companies. However, Peek warns that companies should be prepared for continued scrutiny by shareholders.
“While 2021 was better than 2020, there were issues that companies had to manage, including supply chain issues that would have been unforeseen at the time that 2021 incentive goals were set. If a company made a discretionary adjustment to address these unforeseen circumstances, they should provide clear disclosure and rationale so shareholders can understand the reasoning behind a committee’s decision.”

ESG Role in CEO Pay Growing, but Limited

With ESG continuing to be a hot topic among public company boards and their shareholders, it was enlightening to see how the subject factored into the report’s findings. An overwhelming majority of early filers (95%) stated that they are including their ESG strategy either within the compensation discussion and analysis or in the broader proxy statement. And the number of early filers incorporating ESG metrics into their CEO incentive plans in 2021 obliterated the 2019 figure, with nearly half of companies utilizing the strategy, compared with 30% in 2019. While ESG is clearly rising in importance in both boardrooms and CEO incentive plans, both Peek and Czyzewski note that its prominence as a factor in CEO pay is limited by its difficulty to measure.
“It is less common for companies to include an ESG metric in the long-term incentive plan for a variety of factors, including the ability to set objective and credible multiyear goals,” says Peek.
Czyzewski points out that sustainability is just one of several emerging factors that are being leveraged to bolster CEO performance.
“Other metrics used were diversity, equity and inclusion initiatives, as well as other human-capital-related measures, such as employee engagement. The ESG measures that are deemed the most important to the organization, and are therefore included in incentives, can vary by industry.”

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