A Surprise in CEO Pay

After mostly rising in recent years, CEO pay has leveled off, recent filings show. Why boards’ moods have shifted in this much-watched arena.            

If you want a raise, you have to perform.


It’s a refrain employees hear often—and now many CEOs are apparently hearing it as well. According to a Korn Ferry analysis of spring proxy filings, CEO compensation for year-end 2022 is coming in flat or down versus 2021. And experts say the trend will remain that way this year. “CEOs had a tough time hitting their earnings and stock price targets last year,” says Wayne Guay, a professor of accounting at the University of Pennsylvania’s Wharton School who specializes in executive compensation. “Boards,” he says, “were in no mood or position to make discretionary upward adjustments.”


With the economy down, and stakeholder pressure growing, the trend suggests boards are showing a renewed level of conservatism toward top-drawer compensation. In all, bonuses and equity incentives account for upwards of 70% of a CEO’s pay. As Irv Becker, vice chairman of executive pay and governance at Korn Ferry, sees it, "recent CEO bonuses were below prior year levels, and this is what really drove down pay levels in 2022.” Boards, he says, "aren’t lowering target pay, they are simply raising their expectations for what performance is required to earn target bonuses." Put another way, boards, says Becker, are doubling down on the pay-for-performance aspect of CEO compensation.


CEO compensation has been on a wild ride in recent years. For companies in the S&P 500, it rose steadily between 2010 and 2019. In 2020, however, as COVID raged around the world, compensation fell, making financial-performance targets and comparisons obsolete. In 2021, pay came roaring back in tandem with the stock market: median CEO compensation increased 14%—the largest single-year gain since 2009—as business performance soared and boards granted generous bonuses and options. For 2022, experts expected increases to normalize at around 4% or 5%, but that was before the stock market fell by some 20%, its worst annual performance since 2008.


CEOs are still getting paid handsomely, with compensation for the top 100 leaders last year outpacing inflation. But experts say the recent flatlining reveals how compensation committees are responding to regulatory changes and heightened shareholder scrutiny. Investors and the media have used CEO-to-employee pay ratios as a powerful shaming tool, says Wharton’s Guay. He also says that changes that took effect late last year in the reporting of CEO compensation—from target pay to realized pay—could explain why it is coming in flat. Don Lowman, global leader of the Total Rewards practice at Korn Ferry, says changes in board and compensation-committee makeup also play a role. “New people are coming onto boards with different ideas and values regarding compensation,” he says. Lowman says the new generation of directors are asking more questions about fairness and transparency, and increasingly linking CEO compensation to metrics in areas of concern to them, such as climate and diversity.


Lowman says the confluence of regulatory changes, shareholder pressure, and director turnover is “having a dampening effect on executive compensation where it doesn’t just go up.” Still, he says, boards can improve long-term incentives for CEOs, where everyone benefits from the upside. “Boards aren’t giving CEOs the benefit of the doubt when the business environment is tough,” he says. “They are saying we are all going to suffer a little in bad times from now on.”


For more information, contact Korn Ferry’s Executive Compensation practice.