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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 over 450 companies annually, are a team of nearly 75 professionals in the U.S. with affiliates in Europe and Asia with experience in a wide array of industries, company life cycles and special situations.

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Current Issues in Executive Compensation

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Featured Viewpoints

S&P 500 CEO Compensation Trends


Followed by a strong year in 2021, where median actual total direct compensation (TDC) pay increased +14% driven by higher actual bonus incentive payments, and in line with consecutive positive total shareholder return (TSR) results — increasing +31%, +18% and +29% in 2019, 2020 and 2021, respectively — median S&P 500 CEO pay remained flat in 2022. This leveling off of pay was a result of lower actual bonus incentive payments and a substantial decrease in TSR of -18%.

Historical Trends in CEO Actual TDC Pay

Historically, CEO actual TDC pay increased at a modest rate: in the +2% to +6% range for 2012-2016. CEO actual TDC pay accelerated with an +11% increase in 2017 — likely reflecting sustained robust financial and TSR performance — before returning to +2% in 2018 and +1% in 2019, more in line with historical rates. Despite strong TSR in 2020, CEO pay remained flat largely due to the negative impact of the COVID-19 pandemic; 2021 reached a record high in actual TDC and strong TSR performance whereas in 2022 the slowdown of TSR and financial performance resulted in lower actual bonus incentive payments.

In 2022, similar to 2020, we observed the lowest CEO pay change over the past decade, which was in part explained by a lowest 1-year TSR for 2022 (-18%) over the last 13 years (Figure 1).

Our S&P 500 CEO pay analysis is focused on actual TDC for CEOs with >3 year in tenure, which reflects bonuses based on actual performance; this is different from target TDC or target pay opportunity, which reflects target bonus and is typically set at the beginning of the year.

Figure 1.

CEO Pay Continues to be the Main Focus in Current Environment

In 2022, most CEOs navigated an economic slowdown compared to the strong year of 2021. Median S&P 500 CEO actual TDC remained flat driven by lower actual bonus incentive payments offsetting the increase in salary and long-term incentive (LTI) awards. Compared to the previous year, 2022 median and actual bonus incentive payments decreased -15%, while base salary and actual LTI increased +4% and +9%, respectively. Median S&P 500 CEO actual TDC generally remained flat for most business sectors, with Consumer Staples and Real Estate seeing the highest increases year over year of +19% and +10%, respectively.

The decrease in actual bonus incentive payments and no growth in CEO actual TDC is correlated with the decrease of -18% in the S&P 500 TSR performance over the 2022 calendar year.

However, 2023 financial performance has recovered, and unemployment rate continues to be low, though several high growth industries like technology and life sciences experienced substantial layoffs in 2023. Although inflation has subsided since the 2022 peak of ~9%, there are continued supply chain issues, geopolitical influences, layoffs, and business uncertainty into 2024.

Despite the market volatility having presented major challenges for companies during the year, we expect 2023 CEO actual TDC pay data to increase in the low single digits, likely due to larger LTI awards provided, in part, for retention.

Trends in CEO LTI Vehicles

In 2022, performance-based shares continued to be the most prevalent LTI vehicle (Figure 2). The prevalence of performance-based shares has slightly increased while options have seen a decrease. Meanwhile, the use of time-based restricted stock / restricted stock unit (RSU) awards has stayed relatively consistent with the previous year (69%).

For the years 2023 and 2024, we anticipate the continued use of performance-based shares, coupled with a relatively slight increase in time-based restricted stock / RSU awards. The rise in performance-based plans throughout the years can largely be attributed to the introduction of Say on Pay in 2011 and the preferences of proxy advisors and many shareholders toward LTI systems that they consider to be “performance based.” (Note: the proxy advisors generally do not consider stock options to be performance based.)

Figure 2.

Trends in CEO Actual TDC versus S&P 500 Index Performance

In recent years, CEO actual TDC pay increases have been supported by strong TSR. In fact, pay increases over the last 10 years have trailed TSR performance by ~8% when examining the compound annual growth rates (CAGR) of compensation and shareholder return over the last decade: the TSR CAGR was 12% while CEO pay grew at 4%. TSR performance is notable for 2019, 2020, and 2021 (+31%, +18%, +29%, respectively), which supports the significant increase in CEO pay in the last few years. Likewise, during the downturn observed in 2022 TSR (-18%), the pay remained flat in the aggregate.

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 on an annual basis) and comprise a small portion of the executive pay package. Annual actual bonus incentive payments, 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’s actual bonus incentive is often paid 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 actual bonus incentive payments are 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 actual bonus incentive payments while the stock market goes up.

Looking Ahead

Financial performance was mixed in 2023, the labor market cooled slightly, and layoffs and restructuring continued in many sectors. On the other hand, a lower percentage of economists are predicting a recession in 2024 (compared to this time in 2023) as the Federal Reserve has signaled it may cut rates as inflation continues to come down — there is increased optimism that a “soft landing” may be achievable. We expect continued negative pressure on executive pay from the media, the government, social activists, proxy advisors, and some institutional investors.

Below are our CEO pay projections:

  1. CEO actual TDC for 2023 is likely to increase in the low single digits, as actual bonus incentive payments will likely be down from 2022 (will vary by industry) but will be offset by larger LTI grants made in early 2023.
  2. In 2024, given continued uncertainty in the economy and as Compensation Committees continue to be cautious, we expect CEO target pay to increase in the low single digits.


The CEO actual TDC pay analysis consists of S&P 500 companies led by CEOs with a ≥3-year tenure. Actual TDC reflects the sum of base salary, actual bonus incentive payments, and 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 1-3 years).

Note on Realizable Pay

Our methodology used year-over-year CEO actual TDC 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 time-based restricted stock / RSU, and estimated value of performance-based shares. Our past research has shown a strong correlation between realizable pay and TSR performance. While we have shown there is a positive correlation between CEO annual TDC 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

Trends in S&P 500 Board of Director Compensation


Board of Director remit has expanded over recent years as outlined below. This has resulted in greater accountability and oversight for emerging areas of investor attention in addition to the corporate governance and fiduciary responsibilities to shareholders, community stakeholders, employees, and other key constituents, including:

  • ESG issues
  • Diversity, equity, belonging, and inclusion with requirements to analyze and report gender pay parity and pay transparency in select geographies
  • Human capital, succession planning, and talent management
  • Cyber security, digital, and privacy issues relating to artificial intelligence and machine learning

While the responsibilities of the Board continue to evolve and expand, director compensation increases have remained generally modest with a +1% annualized increase since 2020. Pay Governance reviewed non-employee director compensation levels for S&P 500 companies over the last three years using information within the most recent proxy disclosures.1 Our observations generally reflect compensation for fiscal years 2020, 2021, and 2022. In addition, we compared 2022 director pay information to findings from 2015 from our previously published Viewpoint titled “Board of Directors Compensation: Past, Present and Future” in an effort to identify long-term trends in both director pay levels and design.2

Key Findings & Trends

Over the last three years, median S&P 500 director pay levels have increased at a modest pace. Total cash compensation (TCC)—or the sum of Board and Committee member retainers and Board and Committee meeting fees—was flat, while annual equity retainers increased by +3% each year. Total direct compensation (TDC)—or the sum of total cash and equity retainers—increased by +1% on an annualized basis. When analyzing year-to-year trends, we observed a dip of -2% in median TDC in 2020 (as disclosed in proxy statements filed in 2021), followed by a rebound of +5% in 2021 median TDC and then a modest increase of +1% in 2022 median TDC. This likely reflects the impact of temporary COVID-related pay reductions many Boards elected to take during 2020.

When we take a longer look back at historical director compensation levels, the trend is consistent with our more recent observations. Since 2015, median TDC increased by +2% on an annualized basis. The median value of premium fees for leadership roles, namely Lead Independent Director and Non-Executive Board Chair incremental fees, have increased at a quicker pace than total pay for a “typical” director (i.e., a director who is not in a board or committee leadership role). Lead Director incremental fees increased by +7% on an annualized basis, while Non-Executive Board Chair incremental fees increased by +5% on an annualized basis.

Note: TDC for a “Typical Director” reflects the sum of Board cash retainers, Committee member retainers, Board and Committee meeting fees, and annual equity retainers. Incremental fees for Board and Committee leadership roles are excluded (e.g., Committee Chair Retainers, Lead Director Retainers, Non-Executive Board Chair Retainers).

Board Service Pay Mix

The portion of total compensation delivered in cash versus equity, or overall pay mix, has been relatively stable at approximately 40% cash and 60% equity. Over the last two years, we have seen the proportion delivered in equity inch slightly higher (to 62% equity), as meaningful increases in director compensation are more commonly provided through equity than through cash-based compensation.

Cash Fees for Board Service

The median value of annual cash retainers for board service has remained constant at $100,000 over the last three years. We continue to observe fewer S&P 500 companies providing meeting fees, with the most recent prevalence at 9% (compared to 12% prevalence in 2020 and 18% prevalence in 2015). However, we note that the decline in the use of meeting fees is somewhat offset by the increase in committee member retainers. Among companies that provide a fee for each board meeting attended, the median value of $2,000 per meeting has remained constant over the last three years.

Equity-Based Awards

The median value of total equity awards has steadily increased over the last three years, with the most recent median value equal to $185,000. Although full value shares (e.g., restricted shares/stock units, deferred shares/stock units, common stock) remain nearly universal in prevalence (provided by 96% of S&P 500 companies), the use of stock options has increased slightly since 2020 (provided by 9% of S&P 500 companies in both 2021 and 2022).

TDC for a “Typical” Director

The median sum of all cash-based and equity-based fees to a director who is not in a board or committee leadership role (a “typical” director) was $300,000 for 2022 and reflects a modest increase of +1% compared to 2021 median TDC. This followed a higher increase of +5% between 2020 and 2021. Many companies froze or deferred increases to director compensation levels during the pandemic but resumed increases for 2021 as observed in 2022 proxy filings.

Note: Independently arrayed, will not sum to total

Fees for Committee Service

Additional retainers provided to committee members and chairs have remained stable over the last three years. The only increase observed at the median was for Audit Committee Chairs, where the median value increased from $20,000 to $25,000 in 2022. This reflects a differentiation from Compensation Committee Chair retainers where the median value remained at $20,000. The Chair of the Nominating and Governance Committee continues to have a median retainer of $15,000. When additional fees are provided for committee service, members of Audit Committees typically receive a higher retainer (median value of $15,000) than members of other committees (median value of $10,000).

Fees for Board Leadership Roles

In the last three years, we observed a steady increase in premium pay for Non-Executive Board Chairs and a modest increase in premium pay for Lead Independent Directors. The median value of incremental fees for Non-Executive Board Chairs was $177,500 in 2022 and represents 161% of the total pay that is provided to a “typical” director. The median value of incremental fees for Lead Independent Directors was $40,000 in 2022 and represents 113% of the total pay that is provided to a “typical” director.

Director Stock Ownership Guidelines

There has been very little change in S&P 500 stock ownership requirements for directors over the last three years. Prevalence is nearly universal, with guidelines in place at 95% of the S&P 500 companies. The most common stock ownership guideline is 5X the annual board cash retainer with a time requirement of five years.

Director Pay Limits

Approximately 70% of S&P 500 companies have established annual limits on non-employee director compensation, which reflects significant growth in prevalence over the last 10 years. An increase in the number of lawsuits brought against companies asserting that directors were breaching their fiduciary duties and awarding themselves “excessive” compensation, especially in the form of equity compensation, led many companies to establish “meaningful” director pay limits over the past decade. These limits are typically found within new or amended stock plans that are specifically applicable to non-employee directors and are typically substantially lower than the individual limits under stock plans related to all employees. Practice is split between defining annual limits as equity-based awards only or defining limits as a total of all cash and equity-based compensation. Both definitions have a median value of $750,000. A limited number of S&P 500 companies define cash-only annual non-employee director pay limits with a median value of $500,000.

Total Board Cost

The size of S&P 500 boards has remained relatively stable over the last three years, with an average of about 10 independent directors serving on the board. The median total board cost, or the aggregate of all cash and equity-based fees plus “all other compensation” actually paid to all non-employee directors as reported in the proxy statement’s “Director Compensation Table,” increased to about $3.2 million in 2022. This represents an increase of about +3% over the 2021 total board cost and, over the last three years, reflects an annualized increase of +2%.


In recent years, the core profile of an S&P 500 director pay program has remained generally consistent. Although the remit of a director may be expanding, increases in median “typical director” TDC of +1% are modest. The delivery of total pay to directors split as 40% cash and 60% equity has also remained generally constant. Where more movement has been observed is in the continued trend away from meeting fees and increased differentiation in total pay for board leadership roles.

Perhaps it is not surprising that director compensation has increased so modestly. While the role of a director today balances shareholder value creation with increasingly complex stakeholder priorities against a digital backdrop that provides a platform for both greater transparency and potential communication pitfalls, the fundamental purpose of a director is to be an independent, experienced operator who can partner with and, in some cases, coach leadership teams to execute on long-term business strategy while sustaining near-term business performance. For this reason, directors should be compensated fairly for their experience and time dedicated to their Board role without being perceived as being excessively compensated for the role; hence the wider use of Director Pay Limits over the past decade.

General questions about this Viewpoint can be directed to Clement Ma (, Linda Pappas (, Christine Skizas (, or Olivia Wakefield (

1 Board of Director compensation data collected from Main Data Group for constituents of the S&P 500 Index.

2 Board of Directors Compensation: Past, Present and Future. Pay Governance. March 2, 2017. .

Featured Viewpoint

Non-GAAP Adjustments: Impact of Merger and Acquisition Activity on Performance Targets and Results


One of the more complex issues when measuring performance for incentive plan purposes is how to consider the effect of mergers, acquisitions, dispositions, and the related transaction costs (M&A activity) on financial performance during the performance period. This is due in large part to the difficulty in anticipating/budgeting M&A activity when setting incentive plan targets at the beginning of the performance period and the outsized effect such activity can have on financial results (both positive and negative), depending on the measures being used and the effect the transaction may have on shareholder value. Based on our experience, approaches to adjusting for M&A activity are highly situational, and it is difficult to quantify what constitutes “typical” market practice.

This Viewpoint explores the key considerations that drive the treatment of M&A adjustments, and alternatives companies may consider when determining performance for incentive plan purposes using some common transactional situations.

Key Considerations to Adjust or Not to Adjust?

There are several factors a company may wish to consider when addressing whether and how to treat the impact of M&A activity on incentive plans. These include:

Potential Windfall or Penalty: The inclusion of the acquired company’s financial results may materially affect the expected financial performance used to establish short- and long-term incentive targets.

  • A company that uses revenue and/or profitability measures such as operating income, net income, earnings per share (EPS), or earnings before interest, depreciation, and amortization (EBITDA) might easily achieve or exceed its incentive plan targets due to the acquisition.
  • A company that uses a capital return metric such as return on invested capital (ROIC) or return on net assets (RONA) might be penalized due to the inclusion of increased invested capital associated with the acquisition.
  • A company that divests a significant business unit is likely to fall short of its revenue and earnings targets due to the absence of the divested business unit’s operating results for the full year.

Business Strategy: Acquisition-oriented companies may establish revenue and earnings growth rates that anticipate both organic and inorganic growth when setting incentive plan targets, in which case M&A adjustments may not be necessary/appropriate if the acquisitions fall within certain size parameters.

  • A company with a 12% revenue growth rate (e.g., 6% organic and 6% inorganic) establishes a threshold revenue or purchase price level (e.g., $50 million), and any acquisition that falls below the threshold does not result in an adjustment. For acquisitions above the threshold, adjustments are considered on a case-by-case basis.

Tracking/Visibility of Acquired Company Financial Results: In some cases, the acquired company is fully integrated into the financial and operating results of the acquirer, and tracking performance can be difficult. In this situation, it may be easier to add its expected results to the incentive plan’s financial targets rather than trying to exclude actual performance from year-end results. In other situations, the newly acquired business remains a “standalone” entity or is sufficiently large enough where actual results are easily identifiable. Thus, adjusting incentive plan targets or excluding the results from incentive plan calculations are both viable alternatives.

Creating Proper Incentives: Promptly incorporating an acquired company’s expected financial results in incentive plan targets at the time of acquisition helps ensure management has “skin in the game” for the success of the acquired company. On the other hand, some acquisitions may be “fixer-uppers” and excluding their results from incentive plan targets or financial results used to calculate incentives will allow management to make the required operational changes necessary to fairly measure performance. (In the case of companies that use a return on capital or asset measure, the acquisition of a company that lowers overall returns due to high asset/capital and/or low profitability would likely require the lowering of return targets if a decision were made to include the acquired company’s financial results in the incentive plan calculations.)

Shareholder Experience: Some acquisitions may have a near-term adverse effect on the company’s share price, and allowing the financial results to flow through for incentive plan purposes could result in a disconnect between the shareholder experience and management incentive payouts.

  • If the acquiring company also uses relative total shareholder return (TSR) as a long-term incentive plan measure, an adverse market reaction to the acquisition could negatively affect the “in-flight” TSR performance cycles. In this case, management may feel unduly penalized for its actions, although some of the TSR cycles may have a chance of rebounding, assuming the acquisition ultimately proves to be successful.

Transaction Timing: Some acquisitions may occur at the end of the year and may have little to no effect on the annual financial results used to calculate incentives of the acquiring company. In this situation, excluding or including the financial results of the acquired company may simply be decided based on convenience. Transactions that close at the beginning of the year could have a more significant impact on incentive plan results, and an adjustment to the reported financial results or incentive plan targets may help to ensure a fair incentive plan outcome. Newly acquired companies can also have a significant impact on open long-term incentive plan cycles; thus, even if the effect of the acquisition is immaterial on the annual and long-term incentive plans ending in the year of acquisition, future results could favorably or adversely affect in-flight long-term incentive awards, and some form of adjustment may be required.  

Importantly, M&A related adjustments are likely to attract significant shareholder and proxy advisory firm scrutiny, and additional CD&A disclosure may be appropriate to explain the rationale and impact of these adjustments on incentive plan payouts.

Examples of M&A Activity Adjustments

There are three primary methods for addressing the impact of M&A activity on incentive plan calculations. The first is to adjust the incentive plan targets for the expected impact of the target company post-acquisition, the second is to exclude the acquired company’s results for incentive plan purposes, and the third is to not adjust. In some cases, a combination of all three of these methods may be used based on the facts and circumstances.

Below are some common adjustment scenarios:

Fully Adjust Financial Targets for M&A Activity: Some companies adjust performance targets for the estimated impact of M&A activity to try to maintain the same degree of difficulty as the original performance targets. These companies will often rely on the business plan/financial forecast submitted to the board as part of the acquisition approval process to increase both the annual and long-term incentive plan targets. However, small, or late year acquisitions may not require adjustments due to immateriality on incentive plan results. Figure 1 below is an example of how a company adjusted the annual incentive plan targets to reflect the expected results of the acquired company. The acquired company outperformed expectations and delivered $565 million in EBITDA (compared to $500 million), resulting in a payout of 134% of target. If the adjustment to the incentive plan targets had not been made, the incentive plan payout would have been at the 200% maximum.

Exclude M&A Activity from Financial Results in Year of Acquisition: Some companies exclude the impact of acquisitions from the financial performance of the company used to calculate incentive plan results in the year of acquisition. Thus, the annual incentive plan and the 3-year performance share plan cycle ending in the year of acquisition are calculated as though the acquisition did not occur. As noted under transaction timing above, it may be necessary to modify the incentive plan targets for the other open 3-year performance cycles. Figure 2 below is similar to the example in Figure 1 except the company excluded the actual results of the acquired company’s EBITDA in the incentive plan calculation, resulting in an incentive plan payout of 120% of target rather than 134%, as the outperformance of the acquired company was excluded from the incentive plan calculation. If the adjustment to the incentive reported financial results had not been made, the incentive plan payout would have been at the 200% maximum.  

Partial Adjustment for M&A Activity: Some companies may adjust their financial results for only a portion of the acquired company’s financial performance (e.g., 50%-80%) and allow the remaining portion to flow through the incentive plan calculations in order to recognize management’s success in completing the acquisition. While the effect of the acquisition may have a positive impact on the in-flight incentive programs, the targets for future performance cycles will reflect 100% of the expected performance of the acquired company.

Adjustments Related to Divestitures: Some companies will reduce incentive plan targets for the effect of a divestiture, which allows the company to hold management accountable for the operating performance of the divested business unit while it was under its control. This often works well when the divested business unit is not seasonal or cyclical and is performing well. However, if the divested business unit’s performance is rapidly improving with a strong trajectory for the balance of the year, the company might add the divested business unit’s forecasted performance for the remainder of the year to actual performance when calculating incentives. This approach helps encourage managers to ensure the divested business is operating at peak performance and commands a favorable selling price.

Among the examples discussed above, companies will want to check their long-term incentive plan documents (e.g., grant agreements and equity plan) to ensure adjustments for M&A purposes are permissible. Absent a provision in this regard, any adjustment may result in an award modification for accounting purposes and could result in additional expense and disclosure requirements.


In our previous Viewpoint (Impact of Non-GAAP Earnings and Adjustments on Incentive Plan Payouts: Heightened Scrutiny Ahead?) highlighting the use of non-GAAP adjustments for incentive purposes, we covered the basics of incentive plan performance adjustments, identified the issues important to management and shareholders, and provided some “best practices” for using adjustments and adjusted metrics for incentive plan purposes. We have now highlighted the specific complexities associated with M&A activities and divestitures on incentive arrangements. There are several factors a company should consider when determining whether or not to adjust for M&A activities ranging from the prevention of windfalls or penalties to whether the activities are part of the annual business strategy or are aligned with the shareholders experience. In any event, companies should seek to maintain the performance orientation of their executive incentive plans and promote a fair and reasonable comparison of actual performance relative to performance targets when M&A activities occur during the performance year. Attention should also be given to the appropriate disclosure needed to ensure the rationale behind the treatment is clear to mitigate potential shareholder and proxy advisory firm scrutiny.

General questions about this Viewpoint can be directed to Mike Kesner ( or Steve Pakela (

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