Do Executive Pay Increases Really Reflect Corporate Performance?

Of the three non-Guerdon studies we know of with reasonable methodology, one was inconclusive, one indicated that there was a relationship, and one indicated that there was not a relationship. The last study by Guerdon Associates focussed on share ownership, and indicated a relationship in some industries and in larger companies. Since then we have tackled the question with a different methodology and found that there is, indeed, evidence that companies do pay for performance.

In our November and December newsletters we published the latest CEO remuneration data. As promised, we have analysed the latest remuneration increase data in greater depth to establish if there is a clear link between pay and performance.

When we examined our data as a whole there were confounding trends that made it difficult to quantify any pay and performance link. However, when we broke the data down by company size and industry some very clear trends emerged.

We used ASX 300 same incumbent data from GuerdonData to establish Total Remuneration (TR) increases from 2005 to 2006. We combined this with company data (including company size, industry and total shareholder return) from Aspect Huntley. We broke the 120 CEOs and Managing Directors into five groups based on market capitalisation.

Table 1 summarises TR increase data by market capitalisation.


The overall median increase was 11%, but table 1 above shows some significant variation in this figure when company size is taken into account. Figure 1 below graphs the average and median TR increases and illustrates that there is not a simple relationship between company size and TR increases. That is, it is not true that the larger the company the larger the increase in TR. There is clearly another factor influencing TR increases and naturally we want to establish whether or not it is company performance.


The largest increases overall were in the mid-size group of companies. The likelihood of receiving an increase in TR varied in a similar way to the size of the increase. Figure 2 below illustrates the proportion of CEOs and managing directors who received an increase or decrease in TR. In addition to awarding the largest increases, the mid-sized companies were the most likely to increase the CEO’s TR. Similarly, the companies in the smallest size group had the lowest increase in TR and were the least likely to receive an increase.


Industry Demographics

The different company size groupings contain quite different industry demographics. This goes some way to explain the variation in performance. Table 2 provides the proportion of major industry sectors in each size group.


The consumer sector is spread over all size groupings, whereas health care and IT&T tend to be mainly in the smaller size groupings. Companies in the energy, finance and materials sectors are more likely to be in the larger size groupings. It should be noted that only the companies that have published annual reports by October 2006 are included in the analysis. Therefore, companies with a year-end in September or December 2006 are not present. This is particularly apparent in the finance sector since the major banks either had not reported when we extracted our data, or have had a change in CEO over the past two years.

Increase Components

The makeup of the increases was spread across Total Fixed Remuneration (TFR), Short Term Incentive (STI) and Long Term Incentive (LTI). We analysed these components to determine how the companies were delivering the pay increases.

It is well established that overall TR is related to market capitalisation. The remuneration paid to the CEO of a large company will generally be higher than that of a small company, where company size is measured by market capitalisation.

Because of this, we would expect that in smaller companies the size of the increase in dollar terms would be smaller than the dollar increase in large companies. As remuneration increases, we would also expect that a larger proportion of the increase would be made in at-risk remuneration, because the TFR is already high in dollar terms. Our data confirmed both of these expectations as shown in Figures 3 and 4 below. The data represents only those executives whose TR increased from 2005 to 2006.



Fixed pay increases accounted for almost half of the TR increase in the smallest size grouping, however it accounted for less than 20% in the largest size grouping. Those CEOs in smaller companies, on lower levels of remuneration, cannot afford to have as much remuneration at risk as those in large companies on high levels of fixed remuneration.

Company Performance

Company performance was measured in several ways including Total Shareholder Return (TSR), Earnings Per Share (EPS) growth and Return On Equity (ROE). TSR was measured over one and three years because these relate closely to STI and LTI cycles.

Figures 5 and 6 show the relationship between median TSR and median TR increases by market capitalisation.


Figure 5 above relates to one year TSR. The bars represent TR increases and relate to the left hand axis. The lines represent TSR and relate to the right hand axis.

Figure 6 below relates to three year TSR.


Figures 7 and 8 represent the same information but at the 75th percentile.



The graphs show that median TR increases track shareholder return very closely for both the one and three year measures. The trend at the 75th percentile (Figures 7 and 8 above) illustrates the same close relationship for both one and three year TSR. The trend is as readily apparent for the lower performance companies (illustrations not shown due to space limits).

Similar graphs result if we plot EPS growth and ROE against median and 75th percentile TR increases. The data from the three different performance measures provides good supporting evidence that, overall, companies are rewarding superior performance.

© Guerdon Associates 2021
read more Back to all articles