How Risky Is CEO Pay?

In the 2007 financial year 80% of CEOs enjoyed an increase in total remuneration (up from 67% last year), while 20% suffered a decrease (down from 30% last year). 

What is interesting is that at-risk pay, rather than fixed pay, explains most of the movement in CEO total remuneration.  Many cynics and critics may need to re-work their sums and re-consider their views before they speak. 

CEO at-risk pay is truly that.

CEO remuneration has two main components: total fixed remuneration and at-risk remuneration.  Total fixed remuneration is the pay an individual receives for turning up.  As a proportion of total remuneration, fixed remuneration is highest at the lowest levels of an organisation.  This proportion reduces as accountability for results increases and the at-risk proportion of total remuneration rises.  At risk remuneration is comprised of short term incentives and long term incentives.  At-risk pay generally varies with a judgement of the person’s performance.  The at-risk part of pay also increases as a proportion of total remuneration the more accountable an individual is for results. In theory, CEO at-risk remuneration should be highly volatile, as it should vary with company results.  Our analysis reveals that it does.

Guerdon Associates’ analysis (see Figure 1) also reveals that, for CEOs whose total remuneration increased, changes in at-risk remuneration accounted for 77% of the increase.  For CEOs whose total remuneration fell, changes in at-risk remuneration accounted for all of the fall. This confirms that changes in CEO remuneration are very largely driven by at risk pay.

It is interesting to note that boards appear to clearly separate the concepts of fixed pay and at-risk pay.  This is illustrated by the fact that even CEOs whose total remuneration fell (because of a cut in their at-risk pay) on average had a small increase in their fixed pay.

More than 10% of CEOs had reductions in total remuneration greater than 10%.  Of these, only two had any significant reduction in fixed pay.  For 59% of the group, STI payments in 2007 were less than half their 2006 level.  LTI payments in 2007 were less than half their 2006 level for 35% of the group.

About 9% of CEOs had increases in total remuneration of more than 100%.  Of these, 73% had significant increases relating to share-based payments (with or without performance hurdles), while 67% had increases in STIs that exceeded 100%.

Figure 1 illustrates the proportion of the change in total remuneration attributable to increases and decreases in Total Fixed Remuneration (TFR), Short-Term Incentives (STIs) and Long-Term Incentives (LTIs), for CEOs whose total remuneration increased and also for CEOs whose total remuneration decreased.
1207 Rem Increase Attribution Figure
It can be seen that changes in LTI contributed most to the decreases in CEO pay, while changes to STI contributed most to the increases in CEO pay.

Figure 2 illustrates the proportion of Managing Directors and CEOs in the sample who received increases or decreases to various components of remuneration.
1207 Increase proportions figure
Figure 2 shows that 82% of Managing Directors and CEOs received an increase in TFR, 58% received an increase in STIs and 45% received an increase in LTIs.  That is, it is more likely, as it is for most employees, that CEOs will receive annual increases in fixed remuneration than in STI or LTI.  Despite the higher frequency, however, increases in TFR accounted for just 23% of the increase in total remuneration in dollar terms. 

© Guerdon Associates 2024
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