The strengthening economy has translated into higher pay for most employees. It has accelerated pay for their top bosses much faster.
Total direct compensation for CEOs at the nation’s largest publicly traded companies rose 8.7% in the 12 months ending April 30, according to an exclusive Korn Ferry study. That’s more than double the increase of the prior 12-month period, and the fastest annual growth rate since 2010. It’s also far greater than the growth in US wages and salaries, which rose 2.8% over a similar time frame.
But while the growth gap may seem jarring, a CEO’s regular paycheck actually grew at a slower speed than the average US workers’, says Don Lowman, Korn Ferry’s North American practice leader for Executive Pay and Governance. Indeed, CEO base salaries rose only 1.5%. However, the values of annual bonuses and long-term incentives have risen significantly. “Net income for the companies in the study went up by double digits, on average, and that drives annual bonuses. It is a dramatic increase,” Lowman says. At the same time, the US stock market also rose 10.9% during the study’s time frame.
It’s a nuanced idea, Lowman says, but the increase highlights the fact that most of a CEO’s pay is “at risk.” Base salaries (i.e., the amount in the regular paycheck) makes up only 11% of a CEO’s total compensation. The boss’ annual bonus makes up 21% of the total pay mix, and 68% of compensation is a mix of stock awards, stock options, and long-term incentive cash.
In all, CEOs were compensated, on average, $13.4 million in a combination of salary, bonuses, and long-term incentives, according to Korn Ferry’s 11th annual CEO Compensation Study. The report analyzes proxy statements to determine pay for the bosses at the country’s 300 largest public firms.
Companies have generally not awarded CEOs big salary increases over the past several years. Much of that has to do with taxes; companies could deduct the cost of performance-based pay over $1 million. The tax legislation passed at the end of 2017 eliminates that deduction, however, meaning that, at least in the eyes of the IRS, CEO performance-based pay and CEO salary above $1 million is the same. Lowman believes that the change may shift the CEO pay game, with base salaries rising and becoming a larger portion of overall CEO compensation.