Is CEO remuneration really going down?
02/10/2014
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There are well publicised examples of incoming CEOs with fixed remuneration significantly lower than their predecessor’s. Other analysis suggests that median levels of CEO remuneration have reduced since 2013. This is not true when the remuneration of same incumbent CEOs is compared, but is true when new incumbent CEOs are included.

 

We investigated the overall relationship between tenure and fixed remuneration for Chief Executive Officers (CEOs) of ASX 50 companies. We analysed tenure and remuneration in relation to 45 CEOs for whom the relevant disclosed information was available.

Tenure was measured from the time an individual began their term as CEO to the end of the most recent remuneration disclosures. The CEOs were then categorised into groups of short, medium and long tenure. Short tenure is defined as less than 2 years, medium ranges from 2 to 5 years and long tenure is 5 years and more. Table 1 shows how the CEOs were distributed across the three groups.

 

Table 1: CEO tenure summary

CEO Tenure

Number of CEOs

Average Tenure

Average Market Capitalisation

Short tenure (0 to 2 years)

13

1.2

$40.3bn

Medium tenure (2 to 5 years)

13

3.3

$23.2bn

Long tenure (5 years or more)

19

9.4

$24.3bn

Total

45

5.3

$28.1bn

Because of the impact of company size on remuneration, it is not useful to simply compare tenure and fixed remuneration, without adjusting for size.

 

Table 1 indicates that tenure varies according to company size. In particular, short-tenured CEOs are, on average, from larger companies. To explore this further we analysed the tenure based on company size. Of the largest 15 companies in our analysis, the average tenure was 3.8 years. This compared with an average of 6 years for the remaining 30 companies.

The following graph shows the relationship between CEO fixed remuneration and market capitalisation, when tenure is used to differentiate the CEOs. Market capitalisation, along the horizontal axis is on a logarithmic scale.

 

CEO%20Fixed%20Remuneration%20Image%201%2

 

Figure 1: CEO fixed remuneration and market capitalisation

 

The graph shows that the short tenured CEOs (in green) have significantly (20%) lower fixed remuneration than their long tenured counterparts (in blue), regardless of company size. It also shows that medium tenured CEOs (in red) have lower fixed remuneration than the longest tenured CEOs, but only for the larger companies, above $20bn market capitalisation. This suggests that larger companies have been constraining the remuneration of incoming CEOs for a longer period than smaller companies.

We also analysed the relationship between company performance and CEO tenure. Two year and five year TSR were analysed, because the periods aligned with our tenure definitions. Table 2 summarises the variation in TSR statistics, based on CEO tenure.

 

Table 1: CEO tenure summary

CEO Tenure

2 Year TSR

5 Year TSR

25th Percentile

50th Percentile

75th Percentile

25th Percentile

50th Percentile

75th Percentile

Short tenure

16%

31%

43%

12%

23%

77%

Medium tenure

37%

44%

53%

10%

55%

82%

Long tenure

33%

50%

69%

44%

105%

135%

Overall

23%

42%

59%

20%

58%

123%

The impact of shareholder returns is clear when the data is shown graphically below. The interquartile range is shown in blue and the median in red.

 

CEO%20Fixed%20Remuneration%20image%202%2

 

Figure 2: CEO fixed remuneration and market capitalisation

Companies with shorter-tenured CEOs tended to have lower shareholder returns than companies with longer tenured CEOs. There are many factors at work here, however, this is, in part, because companies performing well are very unlikely to willingly turnover their CEO. The converse is also true, that lower performance may precipitate CEO turnover.

We have established that CEO fixed remuneration is lower for shorter tenured CEOs. Given that company performance is also lower for this group, incentives are likely to be lower and therefore the difference in total remuneration should be even more significant.

Incoming CEOs have probably always received lower levels of remuneration, on average, than their predecessors. However the size of the difference, at 20%, appears to be larger than was the case in the past. The primary reason may relate to shareholder and proxy adviser scrutiny, and this is likely to be most intense when relative company performance is perceived to be low. It is interesting that there is no compelling evidence that incentive opportunities are being increased to compensate for the reduced fixed remuneration levels at this time.

© Guerdon Associates 2021
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