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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 professional 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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S&P 500 CEO Compensation Increase Trends. Larger increases in recent years — with uncertainty for future increases

Introduction and Summary

CEO pay continues to be an extensively discussed topic in the media, in the boardroom, and among investors and proxy advisors. CEO total direct compensation (TDC; base salary + actual bonus paid + grant value of long-term incentives [LTI]) has increased at a moderate pace in recent years — in the 2-6% range for 2011-2016. However, CEO pay accelerated in 2017 at an 11% increase, likely reflecting sustained robust financial and total shareholder return (TSR) performance.  Our CEO pay analysis is focused on historical actual TDC, which reflects actual bonuses; 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 come out in early 2019, we expect 2018 CEO TDC increases may be in the upper single or low double digits based on past pay trends as a result of strong earnings growth and a tight executive labor market. These likely large increases will be further supported by +22% S&P 500 TSR in 2017.

However, given the recent U.S. stock market downturn and a potential global slowdown, 2019 CEO target TDC will likely return to historical, moderate increase levels of flat to low single digits due to  economic uncertainty and low TSR (-4% S&P 500 TSR) in 2018. Executives in industries with favorable economic conditions and higher growth will likely see bigger pay increases than those in slow-growth industries.

Historical Trend 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.[1]Since then, year-over-year pay increases have been moderate —in the 2-6% range —except for the 11% increase in 2017 (Figure 1).

Over the last several years, LTI vehicle use has shifted away from stock options, mostly in favor of performance-based plans. From 2009-2017, 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 proxy advisors and some shareholders considering performance share plans, and not stock options, to be performance-based. There could be an uptick in stock option usage in the future given the stock market’s current volatility, especially if a recession were to occur and companies were to struggle to set long-term goals in their performance share plans. We noticed that many companies made stock option grants during the depth of the great recession in early 2009, as goal setting was challenging and stock options provided a direct linkage to share price improvements and an opportunity for significant upside leverage.

Trend in CEO Pay versus S&P 500 Index Performance

CEO pay increases have been supported by strong TSR; in fact, pay increases over the last 7 years have trailed TSR performance by approximately 9% based on the Compound Annual Growth Rate. In every year TSR increased, CEO pay also increased (Figure 3). These increases were not always proportionate: from 2011-2017, each annual pay increase was ≤11%, while the S&P 500 TSR ranged from 1-32%.

There is clear 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. CEO base salaries sometimes only periodically increase (i.e., less than on an annual basis) and typically only comprise a small portion of the executive pay package. Annual actual bonuses, though not as large as the LTI portion, can have a meaningful impact on whether pay increases year-over-year. When a company is having a good year and is exceeding budget goals and 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 goes down due to stock market volatility or correction and sector rotation (this will likely happen for bonuses paid in early 2019, as 2018 performance was strong for many companies). The opposite can also happen: goals are not met, resulting in lower bonuses, while the stock market goes up.

CEO Pay Projections

1)    We expect overall 2019 CEO target TDC to be flat to up in the low single digits for many executives in most industries.

       a)    Our research suggests that CEO pay increases were lower in 2011-2016 (Figure 1); however, strong acceleration occurred in 2017 and possibly in 2018.

        b)   Aggregate S&P 500 Index year-over-year revenue and earnings per share (EPS) for 2018 are forecasted to increase by 7-9% and 18-20%, respectively (earnings are up significantly in part due to the corporate tax cut; based on data sourced from S&P Capital IQ).

        c)    EPS forecasts for 2019 are currently showing 9-11% growth over 2018 (S&P Capital IQ), though we suspect this number could be optimistic given economic uncertainty.

        d)   Slower earnings growth, the media, income equality optics from the CEO pay ratio, and proxy advisor scrutiny will likely exert negative pressure on executive pay.

        e)    We expect CEO target pay increases in early 2019 to be flat to up in the low single digits due to 2019’s economic uncertainty and low 2018 TSR. Boards will likely become more conservative on pay increases, even though they will continue to offer market-competitive pay to help retain executives in what still appears to be a competitive labor market.

2)    In certain high growth industries — such as biotechnology or information technology — executives may experience continued faster growth in total compensation in 2019, while executives in slow-growth industries might see smaller or no increases.

The above projections do not account for major market shocks (e.g., geopolitical or trade uncertainty, dramatic changes in the economic environment, significant modifications to the Federal Reserve’s interest 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 involves ramped-up pay over a period of 2-3 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 and are different from 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 high as that between realizable pay and TSR increases.


[1]“CEO Pay Trends.” Equilar 2009

Questions about this Viewpoint can be directed to Aubrey Bout ( Brian Wilby (

Featured Viewpoints

Are Share Buybacks a Symptom of Managerial Short-Termism?


Corporate share buybacks (also known as repurchases) have been somewhat controversial for many years, but have taken on even greater significance following the corporate tax cuts passed in 2017 and implemented in 2018. It is estimated that buybacks reached $1 trillion in 2018, likely fueled by extra cash resulting from the tax cuts. Buybacks are also gaining attention across a broader cross-section of the political arena, as three U.S. Senators and an SEC Commissioner have recently criticized share buybacks, with each commentary citing different criticism and potential solutions. [1], [2], [3] However, the common charge is that U.S. public companies are returning money to shareholders instead of investing in productive projects, equipment, workers, and long-term growth. Many buyback critics state the use of earnings per share (EPS) as an incentive metric and stock options inappropriately rewards executives for short-term decisions that reduce long-term value. Specifically, buybacks are criticized for mechanically increasing short-term EPS and “popping”the stock price to generate executive payouts at the expense of long-term performance.

This is an important and charged topic, as many large companies conduct share buybacks that are approved by their boards and typically discussed with large shareholders. Despite solid governance and shareholder support, critics of buybacks include some governance and shareholder groups, politicians, the business media, and academics who are opposed to the alleged short-term implications of a buyback or the “shareholder primacy”model in general.

To bring some important facts to the debate regarding the reality of corporate capital allocation and investment, Pay Governance has updated and expanded our original research on the relationship among share buybacks, long-term growth, and executive compensation for S&P 500 companies. This new study builds on the findings from our prior analysis; importantly, it adds total shareholder return (TSR) and other metrics evaluated not only during, but after, the buyback period.

The Relationship Among Share Buybacks, TSR, CapEx Growth, and Revenue Growth

We examined buybacks (2010-2014) and key financial metrics after the buyback period (2014-2018). We measure share buyback activity by calculating the change in common shares outstanding (CSO).[4]  Using a sample split into groups of companies with above- and below-median change in common shares outstanding, we examined the effect of buybacks on TSR and financial growth data for the subsequent four-year period following the buyback period. Our analysis was based on the same sample as our 2014 research on share buybacks but excluded companies that were acquired or merged. With the benefit of an expanded post-buyback time frame, we were able to compare the long-term performance and prospects for companies with and without share buyback capital allocation strategies.


Contrary to the common assertion that share buybacks damage long-term growth and investment, we found (Table 1) that companies conducting larger share buybacks (-12.8% change in common shares outstanding over four years) showed higher TSR, higherCapEx growth, and higher employee count growth over the subsequent four-year period. Additionally, the companies conducting large buybacks continued to grow revenue in the subsequent period at a pace nearly as fast as the group with smaller buybacks (3.8% annualized revenue growth versus 4.2%). Earnings growth was equal between the two groups (9.15%).

While buybacks are explicitly intended to optimize EPS and potentially increase stock prices, we make no claim that the large buybacks are causing the subsequent favorable TSR and CapEx growth. However, the TSR and other data in a “post-buyback”period appear to demonstrate no long-term damage or obvious cannibalization of CapEx investment. This is confirmed in the following sections.

While it is possible a company could have grown revenues even further through investing or hiring, it is also not clear that incremental investment would have resulted in higher revenue growth or, more importantly, earnings growth that shareholders would have valued on par with a share buyback. The equal bottom-line EPS growth (9.15% annualized growth) between the two buyback groups suggests that both appear to be optimizing earnings growth.

The Relationship Between Short-Term TSR and Long-Term Performance

The argument of corporate myopia, or short-termism, hinges on the claim that short- and long-term corporate financial success are frequently antithetical and present an excessive trade-off. Examples of such commentary include arguments stating that buybacks damage future results and that companies reduce other investments to attain short-term profits at the expense of long-term growth and profitability.

To examine this, we expanded our investigation into how companies' strong short-term performance affected long-term performance as measured by TSR and CapEx growth. If the corporate sector is broadly myopic, we would expect companies with higher short-term TSR to have lower subsequent long-term TSR and lowerCapEx growth. It seems reasonable to test whether companies that are making short-term cost savings decisions (e.g., reducing CapEx growth) to increase the short-term stock price are consequently damaging their long-term value.


To test this (Table 2), we reviewed and compared S&P 500 companies with low and high short-term TSR (below and above sample median, respectively)to the subsequent long-term TSR and Cap-Ex growth over eight discrete periods. We found that, with the exception of 2008 (probably due to the financial crisis[5]), each period reviewed showed that companies with higher short-term TSR had equal or higher subsequent long-term TSR andCapEx growth relative to companies with lower short-term TSR.

While this test was not definitive, companies appear to be buying stock  without suffering long-term repercussions or cutting expenses/investments to increase short-term share prices. Rather, the market appears to recognize and reward in the short-term those companies that optimize for the long-term (as illustrated by the correlation between short-and long-term TSR and CapEx growth). While we do not claim that strong short-term performance causes strong long-term performance, it appears that companies are optimizing their capital allocation strategies.

The Relationship Between Executive Compensation Design and Share Buybacks

Much of the criticism of share buybacks focuses on the assertion that executive incentive programs encourage short-term focus on increasing their annual compensation and that this myopia has resulted in share buybacks that are otherwise an inefficient allocation of capital. We examined the relationship between executive compensation design and share buybacks by reviewing the use of EPS as a metric in annual bonus plans as well as the use of stock options in long-term incentive (LTI) plans. Table 3 below presents the results of our findings.


We found that EPS use in annual incentive plans and the use of stock options were indeed associated with increased share buybacks. Contrary to the short-term criticism, companies that granted stock options and used EPS in bonus plans had higher TSR in the period contemporaneous with share buybacks (2010-2014) and the subsequent period (2015-2018).

These findings stress the impact of executive compensation design decisions, including the mix of LTI vehicles and metrics, on company performance.[6] Incentives must appropriately motivate executives to optimize not just a company's operating performance but also its efficient allocation of capital. These findings are not intended to prescribe a particular LTI mix or incentive metric; rather, they demonstrate the importance of selecting the right LTI vehicles and metrics given a company's current and future business outlook.


Following up on Pay Governance’s original research into the relationship among executive compensation, share buybacks, and shareholder value creation, we found even stronger evidence that certain executive compensation structures (granting stock options and using EPS bonus metrics) are correlated with share buybacks. We also debunked two common myths: that share buybacks damage long-term corporate investment and that there is an excessive trade-off between short-term and long-term shareholder returns.

Taken together, these findings suggest an alternate narrative about the relationships between executive pay, share buybacks, shareholder value, and company growth. The contemporary fact-driven story of share buybacks is not one of managers shirking investment and long-term stewardship of corporate capital but one of disciplined capital allocation. Companies conducting the largest share buybacks are not just rewarding shareholders with higher long-term returns; they also appear to be investing in the long-term through capital expenditures.

Executive compensation programs are an important part of the strategic structure ensuring this efficient capital allocation and long-term corporate financial sustainability. The use of short- and long-term financial metrics and share-based incentives remains a proven approach for focusing executive teams on long-term value drivers and aligning executive pay with shareholder interests.

General questions about this Viewpoint can be directed to Ira Kay at or Blaine Martin at


[1] Chuck Schumer and Bernie Sanders. “Schumer and Sanders: Limit Corporate Stock Buybacks.” The New York Times. February 3, 2019.
[2] David Morgan et al. “U.S. Republican Senator Rubio Pushes Plan to Tax Stock Buybacks.” Reuters. February 13, 2019.
[3] Commissioner Robert J. Jackson Jr. “Stock Buybacks and Corporate Cashouts.” The U.S. Securities and Exchange Commission. June 11, 2018.
[4]  Companies in our “Small (or Zero) Buyback Companies” subset include companies that conducted no buybacks and companies that were net share issuers.
[5] 2008’s -50% TSR appears to have generated a substantial and unique bounce-back. The companies in this group, however, on the average did not get back to their 2007 stock prices even after 3 years of subsequent +22% TSR CAGR.
[6] The large amount of executive stock ownership would also serve to balance the pressures in trading off short- and long-term performance.

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