CEO pay rose to $12.4 million in 2018, a ten year record high, while median total shareholder return plummeted to minus 5.8%, its worst since the financial crisis, according to the Wall Street Journal's annual CEO pay report. In a follow-up live conference call held by the study's authors, Theo Francis and Vanessa Fuhrmans, it was noted that one-year pay for performance comparisons are often misleading; for example, TSR performance has largely recovered from its drop at the end of 2018, which greatly impacted the pay for performance rankings of many companies. However, Mr. Francis maintained, even five-year comparisons of pay and performance show less of a correlation than might be expected, noting, "the best performers get rewarded the most - but everyone else gets rewarded almost as much," which is a major them of the article.
The Journal article described at some length the difficulties with using the Summary Compensation Table definition of pay, noting that in several examples of high CEO pay, the CEO did not in fact receive the reported grant-date value due to declines in stock price, changes in plan design, and other factors. To the extent misalignment still exists despite robust use of performance-based compensation, the report blames non-GAAP adjustments to performance metrics, citing the by now ubiquitous Cornell and MIT study showing that CEOs of S&P 500 firms in the top quartile of companies with the largest non-GAAP adjustments announced earnings that were, on average, 23% higher than GAAP earnings and that higher non-GAAP earnings predicted higher CEO pay despite lower performance.
The report concluded with a discussion of the growing complexity of CEO pay packages, referencing recent calls for simplification of executive pay by Norges Bank of Norway and the UK House of Commons (see the Center's white paper on simplification here). Ms. Fuhrmans elaborated on the conference call, noting that paying CEOs in cash and granting time-based equity with a mandatory holding period of at least five years would reduce reliance on complicated (and, it was implied, easily manipulated) performance metrics and allow CEOs to focus on creating long-term shareholder value. However, so far, large U.S. institutional investors have not widely embraced a restricted-stock only approach to long-term performance.