CEOs See Highest Compensation Increase Since Great Recession

June 13, 2018 – In an environment of double-digit growth in shareholder return and corporate income, CEOs at the largest companies in the U.S. last year received the highest compensation increases since the recession, according to a new report by Korn Ferry.

“Even with the anticipation of the CEO pay ratio disclosure mandate, so far we haven’t seen it dampen organizations’ willingness to pay for performance, including strong shareholder value and net income increases,” said the search firm’s 11th annual “CEO Compensation Study.”

The study, which examined pay for CEOs at the nation’s 300 largest public companies, included those that filed proxy statements between May 1, 2017 and April 30 of this year. Median revenues for the 300 businesses were $18.7 billion.

Bonuses Up

Median total direct compensation (TDC) for CEOs increased 8.7 percent to $13.4 million, said Korn Ferry. That is twice as much as last year’s 4.2 percent increase in TDC and the highest percentage increase since 2010, the first year of recovery from the Great Recession.

While year-over-year base salaries remained relatively flat, with a 1.5 percent increase to a median of $1.3 million, a large percentage of the TDC increase came from performance-based compensation growth, said the study. Annual bonuses were up 4.1 percent. And long-term incentive value (LTIs) were up 7.4 percent

When considering the mix of LTIs, performance awards (equity and cash) make up the largest percentage at 56 percent, which is the biggest share of the LTI mix ever recorded in the study, said Korn Ferry. Stock options/ stock appreciation rights made up 20 percent of LTIs and restricted stock accounted for 24 percent.

Willingness to Pay

“In years past, we’ve seen LTI increases but not bonus increases,” said Donald Lowman, Korn Ferry executive pay and governance practice leader for North America. “However, this year we are seeing increases in both areas. Even with the anticipation of the CEO pay ratio disclosure mandate, so far we haven’t seen it dampen organizations’ willingness to pay for performance, including strong shareholder value and net income increases.”

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During the period studied, total shareholder return was up 17.8 percent, said the study. Net income was up 12.6 percent, the strongest since 2011.

Looking to next year, Korn Ferry said it expects changes in the mix of CEO TDC, because of significant changes to the executive compensation deduction rules the Internal Revenue Code.

Tax Rule Changes

“Much will depend on each organization’s financial performance during the coming year, but with the changes in the tax rules governing executive compensation, we expect we will see slightly higher increases in base salaries than in recent years, and that base salary will represent a larger share of the overall mix of TDC for the CEO,” said Mr. Lowman.

Related: Salaries Rising Globally; Biggest Pay Increase In Three Years

In a separate report, the latest ADP “Workforce Vitality Report,” overall wage growth increased by 2.9 percent year-over-year across all industries in the first quarter of this year. The report tracks the same set of workers over time, which provides a more insightful picture of wage growth than overall wage growth.

The growth, down from 3.1 percent annual growth as of December, was driven by strong wage gains for workers in the information industry (5.6 percent wage growth, $41.38 average hourly wage), in the West (3.5 percent, $29.27) and from small businesses (3.3 percent, $25.47). Employees in the resources and mining industry (1.7 percent, $34.96) and in the South (2.5 percent, $25.61) had the slowest wage growth.

Job Switchers Gain

“In the first quarter of 2018 we saw an acceleration in wage growth for job switchers,” said Ahu Yildirmaz, co-head of the ADP Research Institute. “Additionally, as the labor market tightens employers in some industries are paying a premium for talent with special skills. Job holders, job switchers and new entrants in the construction and information industries are all experiencing significant wage growth as employers seek to attract and retain the skilled labor these industries require.”

Related: Mixed Salary Growth Persists Nine Years After Great Recession

Among industries, information continued to lead the way for both wage level and wage growth. In addition to the top overall wage growth number of 5.6 percent, new entrants into the information field had a 7.6 percent increase. Those who successfully switched positions within the information industry had wage growth of 8.3 percent.

Wage Growth Seen in Most Recent Quarter
Overall wage growth increased by 2.9 percent year-over-year across all industries in the first quarter, according to the latest ADP ‘Workforce Vitality Report.’ The report tracks the same set of workers over time, which provides a more insightful picture of wage growth than overall wage growth.

Employment in the information industry, however, grew just 1.2 percent. The resources and mining industry had the lowest overall wage growth, just 1.7 percent. New entrants into the field showed negative wage growth, at -3.5 percent. Employment in the resources and mining industry grew 4.2 percent.

West Leads Way

Workers in the West continued to outpace other regions with 3.5 percent wage growth. Employees who switched firms in the West experienced 8.2 percent wage growth. Workers in the South had the lowest wage growth at 2.5 percent. By firm size, workers at small firms had the highest wage growth rate at 3.3 percent, though employment growth for small firms was just .8 percent.

The Workforce Vitality Report also revealed that more than 21.3 percent of U.S. employees successfully switched firms in the last year. The highest level of switching was from the information industry to the professional and business services industry. Of all the information workers who switched firms, 30 percent switched to the professional and business services industry.

Wages Hold Steady, Talent Rewarded

According to some reports, however, wages are expected to slow. Another forecast by the Hay Group division of Korn Ferry revealed that in the U.S., a three percent salary increase is predicted for this year. Adjusted for the 1.1 percent inflation rate, the real wage increase is 1.9 percent.

Related: Pay for Performance: Not Everyone Agrees On CEO Value

According to a survey released by Willis Towers Watson, pay raises for U.S. employees are expected to hold steady at three percent. The survey also found that employers will continue to reward their best performers with significantly larger pay raises as they look for ways to retain their top talent and strengthen existing pay-for-performance cultures.

“Given the continued low rates of inflation and the ongoing pressure on profit margins, employers remain cautious when it comes to budgeting salary increases,” said Laura Sejen, managing director for rewards, at Willis Towers Watson. “While most companies are feeling little pressure to increase budgets relative to what we’ve seen in recent years, many are starting to question how those budgets are spent and whether their conventional approaches to salary planning are delivering a good return on that three percent investment.”

Related: Increasing Demand for Talent Spurs Steady Wage Growth

Contributed by Scott A. Scanlon, Editor-in-Chief; Dale M. Zupsansky, Managing Editor; Stephen Sawicki, Managing Editor; and Will Schatz, Managing Editor – Hunt Scanlon Media