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Total compensation for CEOs increased nearly 6% in 2018, according to Korn Ferry’s "CEO Compensation Study."
Korn Ferry’s data, which is compiled from the United States’ 300 largest public companies that filed their proxy statements between May 1, 2018 and April 30, 2019, shows that solid company performance directly correlates to the value of CEO compensation packages.
Median total direct compensation (TDC) for CEOs increased 5.8 percent to $13.9 million.
“Despite a year-end blip in the stock market, 2018 was very good for Corporate America,” said Don Lowman, Korn Ferry practice leader, executive pay and governance in North America. “Median revenues for the sample 300 were $20 billion, which is a year-over-year increase of 7.5%. Median net income was $1.8 billion, reflecting an increase of 14.1% from 2017. Overall, companies did well in 2018 and compensation committees rewarded CEOs accordingly.”
The mix of the CEO compensation (e.g. salary, bonus, long-term incentives) remained relatively consistent from last year. In addition, when considering the mix of long-term incentives (LTIs), performance awards (equity and cash) make up the largest percentage at 55%. Stock options make up 21% and restricted stock account for 24%.
While year-over-year base salaries remained relatively flat, with a 1.9% increase to a median of $1.3 million, a large percentage of the TDC increase came from performance-based compensation growth:
- Annual bonuses were up by a median of 3.9% to $2.6 million
- Long-term incentive value (LTIs) were up by a median of 6.8% to $10 million
When looking at long-term performance, Korn Ferry researchers found strong alignment between three-year total shareholder return (TSR) performance and realized LTIs (realized pay from stock option exercises and the vesting of restricted stock and performance equity, all granted a number of years ago) in 2018. CEOs who ran companies within the top third of TSR performance received triple the realized LTI value in 2018 over CEOs at companies in the bottom third.
“Simply put, CEOs who delivered better TSR are being paid accordingly, while CEOs whose companies aren’t performing don’t realize the same level of compensation,” said Irv Becker, Korn Ferry vice chairman, executive pay and governance. “This shows compensation committees are designing pay-for-performance packages that work. Now the focus is on goal setting and results.”