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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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Selecting Optimal Incentive Measures: The Role of TSR Correlation Analysis


The selection of appropriate performance measures to use in incentive programs is a critical decision for management teams and Compensation Committees. While a company’s business strategy should be the primary factor when selecting incentive plan measures, it is insightful to consider other perspectives, such as historical results and market practices. In this Viewpoint, we discuss the role that total shareholder return (TSR) correlation analysis can play in performance measure selection.


TSR correlation analysis assesses the historical relationship between TSR and measures of financial performance.  The TSR-financial performance correlation analysis can be measured using a company’s own history (internal perspective) and a peer set (external perspective). Correlation is not causation. Rather, these analyses assess the degree to which a financial measure moves in the same direction as TSR over time. By examining rolling three- and five-year periods over the past decade, we have identified financial measures that have a relatively strong positive correlation to TSR. However, since there are many company-specific and macroeconomic factors that impact performance over time, these analyses are intended to provide a directional perspective and not be prescriptive.



We analyzed 50 large manufacturing companies and found that the financial measures with the strongest correlation to TSR were: return on invested capital, operating income margin and net income margin. For a group of50 service companies, we found that revenue growth had the strongest correlation with TSR, followed by gross profit, operating income margin, net income margin and return on assets.


Key Inputs


There are several key inputs when conducting TSR correlation analyses. For our illustrative analyses, we utilized the following inputs:


Measures – Sample of financial performance measures spanning the income statement, balance sheet, and cash flow statement. If a standardized database is used, the financial measure definitions will often vary from the specific incentive plan measures used by a company, which typically include certain adjustments.


Comparisons – Change in dollar amounts for income statement measures and the absolute margin or return level for percent-denominated measures.


Time period – Three- and five-year rolling time periods over 10 years (ending in 2017).


Correlation strength – Relatively stronger correlations were defined as being ≥25%.


Example Output


The charts below illustrate the correlation of various financial metrics with TSR over three- and five-year periods. Metrics with correlations of ≥25% are highlighted in green. Financial performance data reflect standardized definitions provided by S&P Capital IQ (they have not been customized or adjusted).

Table A: Industrial Company Metric Correlation Analysis withTSR (50 companies)

Table B: Service Company Metric Correlation Analysis withTSR (50 companies)



TSR correlation analysis provides companies with another perspective as they confirm or reevaluate the appropriateness of their incentive plan performance measures. Due to certain limitations, including the use of historical data at various points in time and the uniqueness of individual companies in a given peer set, TSR correlation analysis should be considered directional. A general correlation analysis, as illustrated here, is a starting point. As a next step, a company may decide that further refinement is warranted in order to determine the most appropriate form of the metric to be used  (i.e., “underlying earnings”). In the end, companies should select incentive plan performance measures that best align to their business strategy to drive long-term shareholder value.


This Viewpoint is intended to inform CompensationCommittees, executives, and compensation professionals about developments that may affect their companies; it should not be relied on as providing specific company advice or as a substitute for legal, accounting, or other professional advice.

General questions about this Viewpoint can be directed toJohn R. Sinkular (,Joshua Bright (,or Phil Johnson (


Featured Viewpoints

S&P 500 CEO Compensation Increase Trends

Introduction ad Summary

CEO pay continues to be discussed extensively 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]) increased at a moderate pace in the first part of the last decade —in the 2-6% 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, which is more in line with historical rates. 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 are filed in early 2020, we expect to find that 2019 CEO TDC increases will be modestly higher (in the low single digits) due to low 2018 TSR (-4% S&P 500 TSR) and economic uncertainty during Q1 2019 when LTI grants were made. Increases in 2019 actual pay will be primarily driven by higher cash bonuses as most companies had strong financial performance in 2019 and exceeded annual goals.

With regard to 2020 CEO target pay, however, we are expecting increases to be in the mid- to upper-single digits as a result of strong 2019 performance and substantially positive TSR in 2019 (S&P 500 TSR was +31%). Executives in industries with favorable economic conditions and higher growth (e.g., technology) will likely see more significant pay increases than those in slow-growth industries.

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 2-6% 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 to 2018, 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 stock market’s current volatility. We noticed that many companies made stock option grants during the depth of the Great Recession in early 2009: this is likely because stock options provided a direct linkage to share price improvements and an opportunity for significant upside leverage, as well as the difficulty in setting multi-year goals at the time.

Figure 1:

Figure 2:

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 8 years have trailed TSR performance by ~6% when examining the compound annual growth rates of compensation and shareholder return (TSR CAGR was 11% while CEO pay grew at 5%). In every year marked by outsized TSR since 2009, CEO pay increased by a greater than average growth figure (Figure 3). These increases were not always proportionate: from 2010-2018, CEO annual pay increases were between 2% and 11%, while the S&P 500 TSR ranged from -4% to 32%.

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 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. The opposite can also happen: goals are not met, resulting in lower bonuses, while the stock market goes up.

Figure 3:

CEO Pay Projections

1) We expect 2019 CEO TDC increases to be in the low single digits due to low TSR (-4% S&P 500 TSR) in 2018 and economic uncertainty during the first part of Q1 2019 that impacted Q1 2019 target pay decisions. Increases in 2019 actual pay will be primarily driven by higher cash bonuses as most companies had strong financial performance in 2019 and exceeded annual goals.

a) Aggregate S&P 500 Index year-over-year revenue and operating income for 2019 are forecasted to increase by 3-5% and 0-2%, respectively (S&P Capital IQ).

b) We expect median CEO target pay increases in early 2020 to be in the mid- to upper-single digits as a result of strong performance and large increases in TSR (+31% S&P 500 TSR) in 2019.

c) Looking into the future, likely slower earnings growth, a high CEO pay ratio, proxy advisor scrutiny, an election year where income equality will be highlighted as a societal problem, and media coverage of it all could exert negative pressure on executive pay.

2) In certain high-growth industries (e.g., technology) and high-performing companies, executives may experience continually increasing growth in total compensation in 2020, while executives in slow-growth industries or low-performing companies might see minimal or no increases.

The above projections do not account for major market shocks (e.g., geopolitical or trade uncertainty, dramatic changes in the economic or political environment, significant and unanticipated 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 1-3 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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