Are We Looking at a New Era in Executive Compensation?

For years, salaries of CEOs have been the subject of conversation and constant debate. Taking the helm at a large publicly traded company can be a grueling, high-risk proposition for an individual, but almost always comes with great reward. Even so, the general sentiment is that executive compensation should correspond directly to company performance and also have a ratio that is in line with the average salary of its company’s workforce. These concepts, in addition to current executives reaching retirement age, may be cause for a new era in CEO pay.

CEO Salaries Unbalanced

Under the Dodd–Frank Wall Street Reform and Consumer Protection Act passed in 2010, public companies are required to reveal actual CEO-to-worker pay ratios. This has not happened as of yet, and some of the largest companies are lobbying against the requirement. Why? In an August 2015 research study conducted by GlassDoor last summer, the average CEO earns 204 times the median worker’s pay.

This is a serious growth trajectory. An article from Bloomberg in 2013 reported, “The average ratio for the S&P 500 companies is up from 170 in 2009, when the financial crisis reduced many compensation packages. Estimates by academics and trade-union groups put the ratio at 20-to-1 in the 1950s, rising to 42-to-1 in 1980 and 120-to-1 by 2000.”

Discovery Communications CEO David M. Zaslav topped the list by earning $156 million in 2014 while median worker pay, based on GlassDoor salary reports, was $80,000, for a pay ratio of 1,951. The second highest was Chipotle, where CEO Steve Ells earned $28.9 million while median worker pay was $19,000, for a pay ratio of 1,522.

Take another example of unbalanced CEO compensation by comparing Ells compensation with another “fast casual dining” category CEO, Ron Shaich of Panera Bread. Shaich’s total annual compensation in 2014 was $3.4 million—Panera has 1,972 store locations and growing with a stock price in the 200s. While Chipotle had about the same number of restaurants at 2,010 in 2015,and the stock price is in the 400s. It’s noteworthy to mention that Ells took a pay cut in 2015—reduced down to $13.4 million—due to several health outbreaks at their stores. Even so, Ells pay is still almost four times that of Shaich.

How Did We Get Here?

Most Fortune 1000 companies have adopted a methodology to analyze CEO salaries from a set of “peer group” companies to help determine what the salary of their own CEO should be. The surveying of peer pay at companies of comparable size emerged in the 1950s by a compensation consulting company with the idea that global businesses needed similar talent to run their organizations. By the 1990s, this peer group concept “had become a go-to tool for boards,” said finance professor from the University of Delaware, Charles Elson, in a recent Bloomberg Business article. Unfortunately, now companies are choosing “aspirational peers” or larger companies to compare executive pay, which is rapidly increasing CEO pay well over comparably sized companies.

For example, from 2011 to 2014, the combined compensation for the top three executives at Jarden Corporation (maker of Bicycle playing cards and Yankee candles) increased more than seven times to $223.9 million—due in part because they chose Oracle and eBay as peer companies to base salaries upon while eliminating companies in manufacturing that were more similar in size and scope to Jarden.

Current Leaders

Baby boomers—those born between 1946 and 1964 still dominate the executive ranks at many large American companies—are the beneficiaries of these current polices and trends in executive compensation. While the boomer executives aren’t retiring in droves as once predicted, they are leaving at a steady pace. At current state, companies rely heavily on male CEOs from this generation. More than 70 percent are still leading Fortune 1000 companies. Companies will need to prepare for the next generation of executives through succession planning, reviews and early identification of high potential talent. This may also be an opportunity for companies to lessen the gap or the CEO-to-worker salary ratio that they’ll be required to report based on Dodd-Frank.

The Future

Our outlook is that a significant shift is coming with regard to executive compensation as these key factors come together in the next few years:

  • Executive salaries rising at a greater rate than revenue growth,
  • Shareholder expectations that executive compensation should correspond more closely to company performance,
  • Actual reporting of CEO-to-worker pay ratios in accordance with the Dodd-Frank law, and
  • Aging baby boomer executives begin to retire.

The current salary models and trajectories are neither sustainable, nor appealing to today’s worker or today’s shareholder. That paired with the aging executive population and federal reporting regulations may result in a new era of executive compensation.

At Executives Unlimited, we are committed to helping our clients develop their strategic executive workforce planning. For information about our services, please call us at (866) 957-4466 or contact us online today.

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