How Risky Is CEO Pay?

Sixty-seven percent of CEOs enjoyed an increase in total remuneration, while 30% suffered a decrease. What is interesting is that at risk pay, rather than fixed pay, explains most of the movement in CEO total remuneration.

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, this pay to “warm the seat” is highest at the lowest levels of an organisation. This proportion reduces as accountability for results increases. At risk remuneration is comprised of short term incentives and long term incentives. It generally varies with a judgement of the person’s performance and 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.

Guerdon Associates’ analysis reveals that changes in at-risk remuneration accounted for 74% of CEO total remuneration increases and 82% of the decreases. This confirms that CEO remuneration is very largely driven by at risk pay.

Figure 1 illustrates the proportion of the increases and decreases in total remuneration which is attributable to increases and decreases in Total Fixed Remuneration (TFR), Short-Term Incentives (STIs) and Long-Term Incentives (LTIs).

NOV Graph 1

Figure 2 illustrates the proportion of Managing Directors and CEOs in the sample who received increases or decreases to various components of remuneration.

NOV Graph 2

Figure 2 shows that Managing Directors and CEOs were more likely (77%) to receive an increase in TFR than STIs (48%) or LTIs (39%). That is, it is more probable, as it is for most employees, that CEOs receive annual increases in fixed remuneration. Despite the higher frequency, however, TFR accounted for just 26% of the increase in dollar terms.

For related articles in this CEO 2006 remuneration increase series see:
Stop Press – CEO 2006 Pay Increases
Top 10 Increases – Did They Earn It?

© Guerdon Associates 2024
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