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Pay Governance LLC is an independent firm that serves as a trusted advisor on executive compensation matters to board and compensation committees. Our work helps to ensure that our clients' executive rewards programs are strongly aligned with performance and supportive of appropriate corporate governance practices. We work with nearly 400 companies annually, are a team of nearly 60 professionals in 13 U.S. locations with affiliates in Europe and Asia with experience in a wide array of industries, company life cycles and special situations.

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Compensation in Volatile Times

Pay Governance understands that this time of considerable uncertainty and volatility can be challenging for everyone, especially as we settle into new work arrangements and routines. Still, our domain expertise is executive compensation consulting. Therefore, each week we will provide you with a short newsletter to keep you abreast of developments in the executive remuneration world.

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Featured Viewpoints

S&P 500 CEO Compensation Increase Trends

Introduction and Summary

CEO pay continues to be discussed extensively in the media, in the boardroom, and among investors and proxy advisors. CEO median total direct compensation (TDC; base salary + actual bonus paid + grant value of long-term incentives [LTI]) increased at a moderate pace in the first part of the last decade — in the 2% to 6% range for 2011-2016. CEO pay accelerated with an 11% increase in 2017, likely reflecting sustained robust financial and total shareholder return (TSR) performance, before returning to 3% in 2018 and 1% in 2019, more in line with historical rates. Our CEO pay analysis is focused on historical, actual TDC, which reflects actual bonuses based on actual performance; this is different from target TDC or target pay opportunity, which uses target bonus and is typically set at the beginning of the year.

As proxies are filed in early 2021, we expect that 2020 overall CEO actual TDC will decrease, potentially by 3-4%, due to the COVID-19 pandemic and lower bonus payouts – there will be some variation with companies in strong performing industries likely seeing increases in compensation; 2020 actual pay will be balanced by steady base salaries and LTI grants, as most companies had strong financial performance at the time awards were granted (typically Q1). The last time CEO compensation decreased was during the 2008 to 2009 “Great Recession,” where the financial crisis triggered a meaningful contraction in the economy resulting in poor company performance and lower CEO pay. With regard to 2021 CEO target pay, however, we are expecting increases to be in the low single digits primarily due to some companies making “supplemental LTI grants” to partially offset for lost value for performance share plans that were damaged and mostly worthless due to the financial impact of the pandemic. Executives in industries with favorable economic conditions and higher growth (e.g., technology and biotechnology) will likely see more significant pay increases, while those in hard-hit industries may see flat or continued pay declines.

Historical Trends in CEO Pay and LTI Vehicles

CEO pay rebounded 31% in 2010 after -9% and -13% decreases during the financial crisis of 2008 and 2009, respectively. Since then, year-over-year pay increases have been moderate — in the 2% to 6% range — except for the 11% increase in 2017 (Figure 1).

Over the last 10 years, LTI vehicle use has shifted away from stock options, mostly in favor of performance-based plans. From 2009 to 2019, performance plan and restricted stock prevalence increased, and stock option prevalence decreased (Figure 2). The rise in performance-based plans can largely be attributed to the introduction of Say on Pay and the preferences of proxy advisors and some shareholders toward LTI systems that they consider to be “performance-based” (note: the proxy advisors do not consider stock options to be performance-based). This being said, we would not be surprised to see stability in the use of stock options — or even an uptick in usage in the future given the COVID-19 pandemic. Many companies made stock option grants during the depth of the Great Recession in early 2009: this is likely due to the difficulty in setting multi-year goals at the time and the fact that stock options provided a direct linkage to share price improvements and an opportunity for significant upside leverage.

Trends in CEO Pay versus S&P 500 Index Performance

In recent years, CEO pay increases have been supported by strong TSR. In fact, pay increases over the last 9 years have trailed TSR performance by ~9% when examining the compound annual growth rates (CAGR) of compensation and shareholder return: TSR CAGR was 16% while CEO pay grew at 7%. The year 2019 is notable in that during a period of excellent TSR performance (31%), CEO pay increased by only 1% (Figure 1).

There is a positive correlation between share price performance and CEO pay. In a positive stock price environment, Compensation Committees are often more supportive of CEO pay increases, typically delivered via larger LTI grants, while CEO base salaries increase modestly or periodically (i.e., less frequently than an annual basis) and comprise a small portion of the executive pay package. Annual actual bonuses, though not as significant as the LTI portion of total compensation, can have a meaningful impact on whether compensation grows year over year. When a company is having a good year and is exceeding budget goals as well as investor and analyst expectations, the CEO bonus often pays above target and increases year over year (often, the share price also increases as company performance is strong). That said, there will be some years where a CEO’s bonus pays above target when the company exceeded its budgeted goals, while the share price declines due to stock market volatility or correction and sector rotation. The opposite can also happen: goals are not met, resulting in lower bonuses, while the stock market goes up — this is what happened to many companies in 2020 in part due to the COVID-19 pandemic.

CEO Pay Projections

1) We expect 2020 overall CEO actual TDC to decline in the low single digits due the COVID-19 pandemic and weaker financial results that impacted bonus payout decisions; there will be some variation with strong performing industries likely seeing increases in compensation .

a) The Aggregate S&P 500 Index year-over-year revenue and operating income for 2020 are currently forecasted to decrease by 5% and 18%, respectively (S&P Capital IQ).

b) We expect median CEO target pay increases in early 2021 will be in the low single digits as a result of LTI compensation increases primarily due to some companies making “supplemental LTI grants” to partially offset for lost value for performance share plans.

2) In certain high-growth industries (e.g., technology and biotechnology) and high-performing companies, executives may experience increases in total compensation, while executives in slow-growth industries or heavily impacted companies might see no increases or declines.

3) Going into Q1 2021, companies will want to be careful and strike a balance of having competitive executive pay with the public, investor, and proxy advisor expectation that companies exercise restraint in light of the pandemic’s continued disruption.

The above projections assume successful global rollout and broad usage of the COVID-19 vaccine; they do not account for additional major market shocks (e.g., geopolitical uncertainty, dramatic changes in the economic or political environment, significant and unanticipated modifications to the Federal Reserve’s interest low rate policies, or significant drops in the overall stock market).


The CEO pay analysis consists of S&P 500 companies led by CEOs with a ≥3-year tenure. Pay data includes base salaries and bonuses paid for each year as well as the reported grant date fair value of LTI awards. Our analysis of consistent incumbent CEOs was designed to highlight true changes in CEO compensation (as opposed to changes driven by new hires or internal promotions, which typically involve ramped-up pay over a period of 1 to 3 years).

Note on Realizable Pay

Our methodology used year-over-year CEO actual pay and was based on the accounting value of LTI as reported in proxy summary compensation tables. These amounts are more akin to pay opportunity than realizable pay, which includes in-the-money value of stock options, ending period value of restricted stock, and estimated value of performance shares. Our past research has strongly correlated realizable pay and TSR performance. While we have shown there is a positive correlation between CEO annual pay increases and TSR performance, we are confident the correlation is not as significant as that between realizable pay and TSR increases.

General questions about this Viewpoint can be directed to Aubrey Bout ( or Brian Wilby (

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Featured Viewpoint

Key Issues Facing Companies That Exceed Financial Expectations

We have written several Viewpoints on COVID-19’s effect on executive compensation programs at severely harmed companies and the potential actions that could be considered to mitigate some of its impact. In this Viewpoint, we review companies that have exceeded initial expectations during the pandemic and the unique executive compensation challenges they may face.


A number of companies were labeled “essential services” by the Federal Government and were not required to shut down during the government-mandated lockdowns at the onset of the pandemic. In many cases, the demand for these essential businesses’ products and services soared and will likely remain in high demand for the foreseeable future, as consumer preferences and behaviors have changed across a wide range of activities including home improvements, at-home fitness, prepared meals, and ecommerce.

Many of these companies have had to overcome significant challenges in keeping employees safe, ramping up operations to meet increased demand, addressing supply chain issues, and mitigating higher costs. In some cases, entire manufacturing facilities were repurposed to address demands in other parts of the business or to develop new products to meet business and consumer needs. Leadership, change management, and communication skills have been at a premium; successful management teams have been able to navigate these challenges and outperform pre-established incentive plan targets.

Questions facing these companies remain, however, as compensation committees must determine if payouts under existing plans should be calculated using formulae established before the pandemic or if adjustments (up or down) are warranted. In addition, compensation committees must review and approve incentive plan targets for 2021 annual incentives and performance share awards and must also evaluate if the long-term incentive plan mix (i.e., the portion of long-term incentives allocated to stock options, performance shares/units, and time-vested restricted stock/units) remains appropriate.


Based on preliminary SEC filings for S&P 1500 companies with a fiscal year ending from April 30th through August 31st, companies that experienced growth in revenue were less likely to have reduced base salaries, altered existing annual or long-term incentive plans, or modified the design of FY 2021 annual or long-term incentive plans. Our research also showed these companies had a median annual incentive payout of 117% of target and a median performance share/unit payout of 118% of target. Shareholders appear to have overwhelmingly approved of the executive compensation programs at these companies—as evidenced by strong support for Say on Pay at recent annual shareholder meetings. While the sample size is relatively small (102 companies’ proxies were reviewed as of November 13, 2020), the actions and payout information for companies that exceeded expectations contrast sharply with companies that experienced a ≥10% reduction in revenues: base salary reductions were far more common, and median annual incentive and performance share/unit payouts were 44% and 49% of target, respectively. While not unexpected, we view this contrast as further evidence that compensation committees are highly attuned to shareholder expectations and adherence to pay-for-performance philosophies.

Companies with fiscal years ending between August 31st through December 31st are likely to be more affected by the pandemic, as they will have operated in the COVID-19 environment for six to nine months. As a result, some companies that have experienced better-than-expected performance during the pandemic may exceed incentive plan targets by an even wider margin than earlier fiscal year end companies, potentially resulting in incentive plan payouts closer to maximum.

Key Issues at Companies that Exceed Expectations

Compensation Committees may want to discuss a range of issues at companies that exceeded pre-established performance expectations, including:

  • Are the performance results and corresponding payouts aligned?
  • What was the impact on key stakeholders?
  • Should all employees share in the company’s success, or should above-target payouts flow to just those individuals or business units that directly contributed to the company’s success?
  • Are 2020 results sustainable? What are the potential implications of setting 2021 performance targets below 2020 actual results?

Are the Performance Results and Corresponding Payouts Aligned?

As previously noted, some compensation committees have not chosen to adjust incentive plan payouts where performance has exceeded expectations, and it is highly likely the use of discretion to reduce incentive payouts would be perceived by plan participants as unfair and potentially disruptive to participant productivity. As also noted, the impact of the pandemic is likely to be greater on certain companies based on their fiscal yearend, and compensation committees may want to confirm formulaic payouts properly align with company results.

Most companies’ pre-established incentive plan financial targets were in line with investor guidance and represented a reasonable degree of stretch based on all-known variables at the time the goals were approved by the compensation committee. Companies also set a performance range around target performance with threshold performance representing the minimum level of performance required to earn a partial incentive payout and maximum performance reflecting outstanding performance.

Some companies used a narrow performance range between threshold, target and maximum performance, where small changes in performance can have a significant impact on incentive plan payouts. Other companies used relatively wide performance ranges, which serve to mitigate the effect of over- or under-target performance on payouts. When reviewing if payouts are aligned with results, compensation committees may want to consider the performance range to determine if the level of outperformance supports a payout that is well above target.

The compensation committee may also want to review how the company performed relative to peers in terms of financial performance and total shareholder return as well as how management anticipated and addressed increased production, personal protection equipment, and other unplanned costs. These additional data points may provide useful context for the company’s outperformance and help the compensation committee support its incentive payout decisions.

Impact on Other Key Stakeholders

In an earlier Viewpoint, we described a “resilience scorecard” that compensation committees could use to fully evaluate a company’s performance and potentially support the exercise of discretion to increase (or decrease) incentive payouts at severely harmed companies. [1] The resilience scorecard is intended to be tailored to each company’s unique situation and might include an evaluation of how well the company and management (i) safeguarded employees’ health, (ii) increased market share, (iii) maintained high levels of customer satisfaction, (iv) increased or maintained employment levels, (vi) strengthened the balance sheet/improved liquidity, and (vii) positioned the company for future success.

Compensation committees may consider using a resilience scorecard based on some or all of the above criteria to fully evaluate company performance and confirm that the formulaic payouts fairly reflect company performance and its impact on all key stakeholders.

Should all Employees Share in the Company’s Success?

Many annual incentive plans are based on a combination of corporate, business unit, and individual performance; these plans generally allow the company to differentiate payouts between high- and low-performing business units and individuals. Other annual incentive plans may be based on overall corporate results, with all participants earning the same percentage of their target bonus based on the corporate performance score. Some companies have discretionary plans, which include several performance metrics; however, a participant’s incentive payout is at the complete discretion of the compensation committee or management.

In cases where the company’s outstanding 2020 financial results are not considered sustainable or are attributable to a small group of employees/business unit(s), the compensation committee and management may believe above-target incentives could be put to better use by selectively rewarding key talent with higher individual incentive awards and investing the remaining incentive dollars in expanding the company’s products and services or strengthening its balance sheet. These companies may want to consider using downward discretion (if allowed for in the plan) to reduce payouts for some plan participants. While we would expect these situations to be relatively rare, such companies will need to clearly articulate the rationale for their decision to plan participants and how it may benefit them in the long run.

Are 2020 Results Sustainable? What are the Potential Implications of Setting 2021 Performance Targets Below 2020 Actual Results?

Generally, shareholders and proxy advisory firms expect companies to establish performance goals that exceed the prior year’s actual results and will call out companies whose performance metrics do not appear challenging. In some cases, companies that far exceeded 2020 expectations may be able to sustain and exceed the high-performance bar in 2021 and beyond. In those cases, it is unlikely the 2021 performance targets will be viewed as problematic by shareholders and the proxy advisory firms. However, that may not make it any easier on management and the compensation committee in establishing next year’s financial targets given the level of economic uncertainty and the fact that the company is in unchartered waters in terms of sustaining such high levels of output while maintaining employee safety. (See our recent Viewpoint on Establishing Meaningful and Rigorous Financial Goals [2] )

On the flip side, some companies may have had a “one-of-a-kind” year in 2020 that is not considered sustainable. These management teams and compensation committees may have an equally difficult time establishing 2021 performance targets given the economic uncertainty and will have the added burden of explaining to investors why incentive plan targets are below prior year results. The good news is recent FAQs issued by Institutional Shareholder Services indicate they expect that some companies will report financial targets below prior year actual results; they have strongly recommended that the Compensation Discussion and Analysis (CD&A) fully disclose the rationale for the lower financial targets. [3]


Executive compensation continues to be intensely scrutinized; given the societal effects of the pandemic, companies that have exceeded expectations and are paying above-target/near-maximum incentives may face heightened attention by some shareholders, proxy advisors, media outlets, government officials, and employees. Compensation Committees should consider examining the company’s performance holistically and disclosing the full range of considerations that support above-target incentive plan payouts in the CD&A. These companies will also need to carefully calibrate 2021 annual and long-term incentive plan targets, which may incorporate relatively wider performance goal ranges, to avoid over-promising and under-delivering or vice versa which may call the validity of incentive plan targets into question.

General questions about this Viewpoint can be directed to Mike Kesner at, Sandra Pace at or John Sinkular at


[1] John D. England and Mike Kesner. “Considering Resilience When Assessing FY2020 Incentive Plan Performance.” Pay Governance. September 9, 2020.
[2] Mike Kesner and John Ellerman. “Establishing Meaningful and Rigorous Financial Goals.” Pay Governance. July 23, 2020.
[3] “U.S. Compensation Policies and the COVID-19 Pandemic October 15, 2020.” Institutional Shareholder Services.

Featured Viewpoint

ISS Policy Change - S&P 500 Companies No Longer Receive Preliminary Drafts of Proxy Advisory Reports During 2021 Proxy Season


In July 2020, the Securities and Exchange Commission (SEC) adopted new rules regarding the solicitation and delivery of proxy voting advice by the proxy voting advice businesses. [1] These new rules, which are extensive and far reaching, will become effective during the 2022 proxy season. Effective December 1, 2021, proxy advisory firm Institutional Shareholder Services (ISS) and other proxy advisors will be required to grant free access to filing companies for review and feedback recommendations at the same time when the voting advice and accompanying materials are sent out to investors.

The proxy advisory firms will also be required to provide, in a timely manner, the registrant companies’ written responses to their investor clients before they vote on proxies—assuming there is a timely response to the advice by registrant companies. The intent of the proposed new rules by the SEC is to increase the transparency of the proxy voting advice. For reference, please see our Viewpoint on the subject. [2]

ISS Policy Change – 2021 Proxy Season

Within the past two weeks, ISS has sent a direct communiqué to all companies in the Standard & Poor’s 500 (S&P 500): ISS will no longer provide draft copies of their research reports to S&P 500 companies prior to issuing their final reports to their subscribers. This policy will apply to companies with annual meetings occurring after January 1, 2021; it is important to note that the new SEC rules referenced above will not become effective for most public companies until the 2022 proxy season.

ISS cites the following rationale in support of their decision to not provide S&P 500 companies with advance draft copies of their proxy advice reports:

  • ISS believes that its recent investment in additional resources in data collection, checks and quality controls, and other research activities has eliminated the need for filing companies to provide feedback regarding the accuracy of ISS reports;
  • ISS has found the preliminary review process has too frequently resulted in companies lobbying ISS to change its recommendations instead of identifying data inaccuracies;
  • Having filing companies review initial report drafts takes time that ISS believes would be better devoted to investor clients in their decision-making process about ISS voting recommendations;
  • Many institutional investor clients have objected to ISS’s decision to offer draft previews to issuers, claiming that they do not want companies engaging in the research process, gaining early access to ISS research and recommendations, and lobbying about research and recommendations before final reports are released to ISS clients; and
  • Eliminating the proxies of draft reports will result in earlier research delivery times, allowing ISS clients more time to consider ISS research in their decision-making and voting actions.

In conclusion, please note this change by ISS only applies to the 2021 proxy season and to S&P 500 companies, with the new SEC regulations taking effect with the 2022 proxy season requiring the very process ISS is eliminating for 2021.

General questions about this Viewpoint can be directed to John Ellerman at or Szu Hui Ho at


[1] “Amendments to Exemptions From the Proxy Rules for Proxy Voting Advice (RIN: 3235-AM50).” The U.S. Securities and Exchange Commission. June 2020.
[2] Lane Ringlee and John Ellerman. “Recent SEC Actions - Clawbacks and Proxy Advisory Firm Regulations.” Pay Governance. August 12, 2020.


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