The Strategist

Compensations of S&P 500 CEOs are not linked to their companies' performance

06/08/2016 - 15:43

There are six industries, which include electricity and diversified financial services, where general directors have the highest incomes and yet their companies deliver the worst results. Other seven sectors, including pharmaceuticals and retail trade, are managed the most efficiently but their CEOs are lowest-paid.

According to ISS Corporate Solutions, over the past five years yield of securities to shareholders in most of S&P 500 companies grew stronger than remuneration of their first persons. Consultants on benefits have a rather simple explanation to the discrepancy between managers’ earnings and the companies’ annual efficiency. According to them the main reason is the fact that in difficult times, some companies reward their top-managers for strategic and operational achievements. Besides, some corporations tie payments to long-term objectives, which may not be affected by poor annual performance.

MyLogIQ’s data analysis shows that median remuneration of S&P 500 CEOs has fallen to about $ 11 million in 2015 compared to $ 11.5 million in 2014. Median annual stock returns, including dividends, amounted to 1.3% versus 18% a year earlier.

The highest paid CEO is Dara Khosrowshahi of online travel booking company Expedia. The 47-year-old top manager made $ 94.6 million last year, including $ 90.8 million in the form of stock options, to be paid over the next four years. Khosrowshahi’s earnings increased dramatically compared to $ 9.6 million in 2014; the bonus is 9 times higher than Timothy Cook’s. Sarah Gavin, a spokesman for Expedia, said that such a high award is intended to keep the top manager at this position in the long term. 

Top managers of automobile companies and companies producing automotive components enjoy the second largest median income ($ 19.3 million), followed by general directors of the pharmaceutical and biotechnology industries ($ 18 million). Executives of banks (with exception for the largest diversified financial groups) are on the last place ($ 8 million).

Analysis of the remuneration of CEOs and financial results of the S&P 500 companies is based on statements published from July 1, 2015 to May 31, 2016. Awards of some well-known top managers were excluded from the analysis, as well as payments of general directors of smaller companies. For example, Sundar Pichai from Google received $ 100.5 million in 2015. He heads the division of Alphabet Holding, which CEO Larry Page officially received $ 1 last year.

Schemes of Restricted Stock Units, involving transfer of rights to shares under certain conditions, amounted to approximately 50% of managers’ remuneration in the past year, and all share incentive schemes – to 63% (57% on average for the last five years). "This is consistent with interests of shareholders", - said Gregg Passin, head of Director Pay at Mercer.

Total benefits of well-known general directors, including Jeff Immelt of General Electric and Howard Schultz of Starbucks, have decreased in the past year, although corporations have shown better results than similar companies in the industry. Top managers of other companies received significantly higher compensation, while the yield to shareholders dropped. Payments to Marc B. Lautenbach, CEO of Pitney Bowes engaged in mail delivery, increased by 55% to $ 10.8 million, while return on equity was 12.2% (with a median value of 0.7% for the industry). Lautenbach’s high compensation is partly obliged to payments on a three-year incentive program. "According to results of the 2015, Lautenbach was paid less than planned, - said Bill Hughes, representative of Pitney Bowes. - And the results of the whole company for three years were strong. " 

Nearly 20 women CEOs of S&P 500 earned more than their male counterparts - $ 14.8 million on average. Among the highest paid female top managers are Safra Catz of Oracle, Marissa Mayer of Yahoo ($ 36 million), and Mary Barra from General Motors ($ 29 million).


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