A great deal of interest is paid to Chief Executive Officer (CEO) compensation when proxies are filed in the beginning of the year, but that’s really old news, representing pay decisions made in 2017 not 2018. Using Aon’s Total Compensation Measurement (TCM) Survey results, we’re able to provide a first look at what’s happening this year and how it compares to the prior year.
For this analysis we reviewed changes in pay for 104 companies that had the same CEO in 2017 and 2018 in the areas of base salary, target bonus, long-term incentives and target net total compensation (base salary plus target variable pay).
Overall, CEO compensation is up only slightly from 2017 to 2018, with target total compensation rising only 4% compared to median total shareholder return for these companies of 18%.
For our analysis, we placed the companies into five revenue sizes:
- Less than $1 billion
- $1 billion to $2.5 billion
- $2.5 billion to $5 billion
- $5 billion to $10 billion
- $10 billion & above
And the following industries:
- Financial Services
- All industries
Executives typically receive modest increases in base salary year-over-year and 2018 is no exception. Aon’s 2017-2018 Salary Increase Survey reports a median projected increase of 3%. However, base salary levels for CEOs in this analysis show virtually no change this year. Salary levels for our selected companies remained around $1 million on average. The largest salary increases were seen among companies with revenues between $1 billion and $2.5 billion and $5 billion and $10 billion as shown in Figure 1.
Looking at the results by industry (see Figure 2), utility companies have the largest salary increases at 5%, followed by the manufacturing industry with an average increase of 4%.
Average CEO Pay Salary (in Millions) by Revenue
Average CEO Base Salary (in Millions) by Industry
CEOs’ target bonus opportunity increased marginally in 2018. The overall median short-term target opportunity as a percentage of base salary for CEOs increased from 125% in 2017 to 130% in 2018.
As with base salaries, increases in short-term incentives were greatest among companies with revenues between $5 and $10 billion (where target bonus went from 128% to 140%) and revenues between $2.5 and $5 billion (where target bonus went from 89% to 96%). Figure 4 shows all industries except for retail saw median short-term target as a percentage of salary increase in 2018. The largest increase at 20 percentage points was in the services industry.
Meanwhile, payouts for 2017 performance, expressed as a percent of target, increased significantly from 106% to 119%.
Target Bonus by Company Revenue
Target Bonus by Industry
One of the evolutions in executive compensation over the last decade has been a movement towards increased performance-based long-term incentive compensation. We continue to see an increase in performance-based plans, although adoption rates have slowed as many more companies now have this type of plan. The prevalence rate increased from 76% to 80% in 2018 while stock options fell from 45% to 42%. Restricted stock prevalence remained stagnant from last year at 55%.
Of the 104 companies in our analysis, 86% offered annual long-term incentives to their CEOs in both 2017 and 2018.
Prevalence Rates of Long-Term Incentive Vehicles
The overall value of long-term incentives increased 4% over the past year. The biggest increase in median long-term incentives as a percentage of base salary was among both the smallest companies (from 100% to 108%) and the largest companies (from 696% to 733%). Other sizes of companies experienced a nominal decline in long-term incentive payouts.
Long-Term Incentives as a Percentage of Base Salary by Revenue
Among the different industries, utilities had the largest increase in LTI payouts (10%) followed by manufacturing companies at 6%.
Long-Term Incentives as a Percentage of Base Salary by Industry
Target Total Compensation
The median target total compensation (TTC) for CEOs increased across all the components of pay with the exception of base salary. TTC increased on average 4% from $6.05 million in 2017 to $6.29 million in 2018.
The most significant increases in TTC were among companies with revenues between $5 billion and $10 billion and with revenues below $2.5 billion. Interestingly, the largest companies had relatively flat TTC year-over-year.
Target Total Compensation by Revenue
The largest increases in TTC by industry are in manufacturing (11%) and financial services (8%). Across the other industries, TTC is relatively unchanged.
Target Total Compensation by Industry
In this current corporate governance environment, investors want to know if CEO pay is aligned with performance. By comparing the TTC increase against the total shareholder return (TSR) for our group of companies we find pay is clearly aligned with performance: TTC rose 4% while TSR jumped 18%.
Participating in Aon’s Total Compensation Measurement (TCM) Survey gets you access to key pay trends, including movements in total CEO pay year-over-year. The survey covers roughly 100 senior management and executive roles, 100 management and individual contributor roles and 100 non-exempt roles. To learn more about participating in the TCM Survey, please contact us.