A new report reveals that stock awards, which include restricted stock and performance-based shares, represented a record portion of CEO compensation in 2018. For S&P 500 CEOs, stock awards alone exceeded 50 percent for the first time. Moreover, they climbed to a record of nearly 40 percent for those in the Russell 3000. These are highly variable components of the total compensation package, often vesting over time or only when the executive meets specific performance goals. At the largest US public companies, they – along with annual bonuses (another variable pay element) – constituted more than 80 percent of the total pay value disclosed in proxy statements.

Published annually by The Conference Board, CEO and Executive Compensation Practices: 2019 Edition also reveals that CEOs of smaller Russell 3000 companies continued to see their salaries grow at a much faster rate than their S&P 500 colleagues. Last year, CEOs of smaller Russell 3000 companies saw an increase in total median compensation of more than 12 percent, compared to a rise of about four percent in the S&P 500.

The report analyzes individual elements of CEO and other senior executives' compensation packages, the evolving features of incentive plans, the results of say-on-pay votes, and the leading board practices on pay design, among other areas. Conducted in collaboration with the international insurance brokerage, risk management, and consulting services firm Gallagher, and the data analysis companies MyLogIQ and ESGauge, highlights from the report include:

Stock awards comprise a record amount of CEO compensation

In the S&P 500, the portion of CEO pay represented by stock awards, which include restricted stock and performance-based shares, increased from 48 percent in 2017 to a record 50.6 percent in 2018.

For CEOs in the Russell 3000, the portion of their pay represented by stock awards rose to a record 39.7 percent in 2018, up from 36.4 percent in 2017.

Given the growing significance of equity compensation, investors are expected to push for additional measures – including longer vesting and holding periods – to ensure that plans reward long-term performance.

Russell 3000 CEOs see bigger compensation gains than S&P 500 CEOs

Since 2010, median total compensation for Russell 3000 CEOs has grown by nearly 70 percent, almost double the rate of CEOs in the S&P 500.

Most recently, in 2018, Russell 3000 CEOs experienced an increase in median total compensation of 12.5 percent, compared to 9.9 percent in 2017. This suggests that smaller companies may begin receiving greater investor scrutiny of their pay packages.

S&P 500 CEOs saw an increase of 4.1 percent in 2018, down from 4.5 percent in 2017.

Despite strong pay gains for Russell 3000 CEOs, actual compensation remains far higher for S&P 500 CEOs

In 2018, median total compensation for S&P 500 CEOs was $12,350,650.

For Russell 3000 CEOs, median total compensation was $4,351,945.

In the S&P 500, the CEO-to-median employee pay ratio is more than twice as large as that in the Russell 3000

A review of the disclosures reveals wide variations, with a median for the S&P 500 (167:1) that is more than twice as large as the one recorded in the Russell 3000 (about 76:1).

The size of the pay ratio is directly correlated to company size. For example, companies with annual revenue below $100 million disclosed a CEO-to-median employee pay ratio of 19.5:1. However, companies with annual revenue of $50 billion and more disclosed a CEO-to-median employee pay ratio of 270:1.

Some companies are testing the use of ESG indicators to drive executives' performance

In 2018, environmental, social, and governance (ESG)-related performance goals were found in the compensation disclosures of 71 companies in the Russell 3000.

ESG-related performance goals almost always apply to short-term incentive plans and appear to be limited to three main categories: environmental compliance, safety (workplace or product), and diversity and inclusion.

"The Conference Board's annual CEO and Executive Compensation Practices study has developed into the most comprehensive benchmarking publication on the executive compensation of US public companies available in the market. In the last few years, our coverage of the S&P 500 has expanded to the entire Russell 3000 universe. This allows our members to conduct a peer comparative analysis across multiple size groups," said Matteo Tonello, Managing Director of ESG Research at The Conference Board's ESG Center and a co-author of the study.

"The growing use of ESG metrics in both short- and long-term incentive plans is not only about an increase in the number of companies using such measures, but also an increase in the types of measures being used, expanding into much broader social and environmental issues," added Paul Hodgson, Senior Adviser at ESG data analytics firm ESGauge and a co-author of the report. "And the latter increase has been driven, in part, by shareholder activism in the area but also by the repeal of Section 162(M), the part of the tax code that allowed companies to deduct performance-related compensation. This repeal has given companies freedom to be more creative in their target setting."

"This is an invaluable resource for compensation practitioners such as lawyers, corporate staff, and consultants charged with building executive compensation programs that attract and retain top leaders. It contains data from all major industries and includes information on incentive award size and structure as well as performance measures, thus giving employers meaningful benchmarks to better inform an executive compensation strategy that drives both individual performance and organizational wellbeing. It is the only resource available that covers the Russell 3000 with such detail," said James F. Reda, Managing Director of the Executive Compensation Consulting practice within Gallagher's Benefits and HR Consulting Division and a co-author of the study. 

The report provides several insights for what's ahead in the field, which include but are not limited to:

Investors' emphasis on "pay for performance" has led to an increase in the percentage of CEO compensation delivered via stock awards. As such, investors with a long-term orientation may encourage companies to extend the vesting and performance measurement periods of such awards beyond the traditional three-year period.

Compensation committees can consider using a wider variety of metrics and can exercise more discretion (including through modifiers or year-end adjustments) in determining the ultimate number of performance-based shares paid to executives. In doing so, however, they should be aware that they could find themselves on a collision course with investors if they choose metrics that investors do not view as appropriate, or use their discretion in a manner that is viewed as de-linking pay from performance.

Some companies are embedding nonfinancial metrics relating to ESG factors in their executives' incentive plans. Given the increasing attention paid by investors and other stakeholders to companies' ESG practices, more compensation committees may consider doing so — especially for ESG factors that are quantifiable, verifiably measurable, and relevant to business strategy.