Author: James Reda
A globalized executive talent pool is converging to become more homogeneous, where dynamic leaders can move across industries and between organizations without regard to size or ownership status (public versus privately held). Remote work has shattered geographic barriers, enabling businesses to tap top talent from virtually anywhere in the world.
These trends are raising the stakes for companies, fueling the already intense competition for executive talent. Gallagher's CEO and Executive Compensation Trends: 2024-2025 Edition highlights US publicly traded company trends — which we see extending globally and trickling down to privately held companies.
Companies must make a key decision: Lead the market or fast follow
Each company has a choice when comparing themselves to the market: Do you want to lead the market by paying senior talent above the median, or be a "fast follower," chasing the market as compensation levels rise.
Each approach carries risk and benefits. While paying more may weigh down the organization, higher compensation offers continuity of leadership. And while playing catch-up may save money, key talent may stray for better pay and opportunities.
Executive compensation follows the stock market
Gallagher's CEO and Executive Compensation Trends: 2024-2025 Edition identifies trends in C-suite compensation based on proxy statements from large publicly traded companies. The latest report includes compensation data for 2,892 companies analyzed by major industry and company size, designed to help companies make informed decisions about executive compensation. Benchmarking data provides an important baseline to understand how compensation committees are responding to economic conditions, regulatory changes and heightened shareholder scrutiny. The analysis focuses on 2023 pay programs as reported in 2024 proxy filings — the most current available, with data supplied by MainData Group.
When stock performance is strong, executive compensation tends to increase, and vice versa. As of the end of June 2024, the S&P 500® experienced an incredible 53% bounce from the 2022 low point, coinciding with reduced fears of a recession and the easing of post-pandemic inflation. This bounce led to a pay recovery in 2023 as executive compensation grew to 5.3%, which is reasonable relative to inflation.
With the specter of a potential recession and lower profits in early 2022, some observers worried about executive pay increases resulting in steep declines in 2022 chief executive officer (CEO) pay. However, by the end of 2022, the S&P 500 increased 7.3% from the October lows, and real gross domestic product (GDP) growth exceeded 2% in the second half of 2022. These improving business conditions triggered a bounce back in CEO pay in 2023. We conclude that the pay-for-performance model is working at most companies, whether buffeted or bolstered by the economy.
Top executive pay reflected the impacts of the economy in 2023, with median CEO compensation increasing among both the Russell 3000® and S&P 500 companies. These increases came after CEO pay declined in 2022, when boards realized inflation continued to distort the economy and the Federal Reserve Bank further tightened the money supply. Moreover, Russia's invasion of Ukraine in February 2022 elevated the risks of higher inflation and a recession.
CEO pay decreased in 2022 after unprecedented growth in 2021 while remaining much higher than pre-pandemic levels. The economic recovery beginning in late 2022 led to a recovery in CEO pay, bringing pay to levels slightly below 2021 highs. Indeed, 2023 pay for S&P 500 companies exceeded the 2021 peak by 3.7%.
CEO pay increased across the board
CEO pay increased 5.3% and 5.8% for the overall Russell 3000 and S&P 500 indexes. This increase contrasts with the decrease in of 5.7% and 2.0% for 2022, compared with the large post-pandemic increases of 29.9% and 16.2% for 2021.
Since 2019, CEO pay for Russell 3000 companies increased 32.4%, 27% for CEOs at S&P 500 companies and 38.6% at Russell 3000 companies, excluding those in the S&P 500. At the same time, the Consumer Price Index increased 19.2% and the GDP implicit price deflator increased 15.3%. From this comparison, we see that CEO pay since 2019 rose well above the rate of inflation, due mainly to the explosion of executive pay in 2021.
Increases in cash compensation contributed to a reversal in total compensation trends. Large companies fared much better than smaller companies. Not only did cash compensation increase for companies earning more than $1 billion in revenue, but long-term incentives (LTI) grew in most cases by double digits. The LTI jump came as a reversal from 2022, when these companies saw decreases in LTI grant values. For 2023, companies earning less than $500 million showed LTI decreases at the median.
Incumbent CEOs fared better than newly hired chief executives
While Russell 3000 CEO pay increased by 5.3%, incumbent CEO pay increased at a higher rate of 6.8%. Similarly, incumbent CEO pay at S&P 500 companies jumped by 7.7% as compared with an overall CEO pay rate of 5.8%. This difference between incumbent and non-incumbent pay suggests that companies continue to reward and strive to retain successful CEOs who can navigate the volatile business climate.
Based on 2023 median total compensation for the Russell 3000, CEO pay increased at a five-year compound growth rate of 7.3%. The compound annual growth in CEO compensation since 2019 reached 10.8% for incumbents — those CEOs in place since 2019.
Utilities and consumer discretionary industry CEOs led pay growth
Median CEO pay increased in nine of the 11 market segments assessed. Utilities (23.3%) and consumer discretionary (16.3%) led, reflecting the strong consumer spending driving GDP growth across the board.
Segment CEO pay leaders in order of growth included utilities (23.3%), consumer discretionary (16.3%), industrials (4.9%), information technology (4.6%), financials (4.1%), communication services (4.0%), health care (2.3%), real estate (2.1%) and energy (0.7%). Just two segments experienced declines in CEO median pay: materials (12.2%) and consumer staples (1.8%).
NEO to CEO pay gap persists
Pay for other named executive officers (NEOs) also increased, but at a slower rate compared with the CEO. Median pay for these other executives increased 3.2% and 4.6% for the overall Russell 3000 and S&P 500 indexes. These NEO pay increases contrast with decreases in 2022 of 2.3% for the Russell 3000 and smaller increase of 3.0% for S&P 500, suggesting that the gap between CEOs and NEOs widened in 2023.
Russell 3000 CFO pay increases came in lower than other NEOs with an increase of 2.3% but reached higher for S&P 500 CFOs at 7.6%. Since 2019, NEOs also received pay increases at rates higher than inflation. NEO pay at Russell 3000 companies increased 27.2%, 24.6% at S&P 500 companies and 37.5% at Russell 3000 companies excluding S&P 500 companies.
Russell 3000 CFO pay reached approximately 38% of CEO pay, while all NEO pay came in at 36% of pay for CEOs. The gap grew larger for S&P 500 CFOs and NEOs, receiving pay at 34% and 31% of CEO pay. NEO total direct compensation compound annual growth rate (CAGR) since 2019 came to 6.2%, compared with 7.3% for CEOs. Since 2019, CFO total direct compensation CAGR of 7.1% rose slightly lower than that of CEOs.
Company size doesn't drive CEO pay
A longstanding rule of thumb in executive compensation consulting holds that pay increases by 15% with the doubling of the company size. This benchmark doesn't apply to today's market. While pay increases remained flat for companies earning less than $50 million in revenue, the five-year CAGR of 17.2% for CEOs reached by far the highest five-year pay growth among all size classes.
The next highest CAGR growth landed at 10.2% for the $200 to $499 million-size group. At the other end of the spectrum, the CAGR for $20 billion and higher came to 4.2%, while the $10 to $19.9 billion revenue group saw a CAGR of just 0.9%. This disparity of pay increase rates between larger and smaller companies shows that compensation gaps continue to close. Smaller companies hire from larger companies and typically represent a higher growth business model. Larger companies face more pressure from shareholders and activists to avoid the pay spotlight.
Further, from 2021 to 2023, the median CEO pay rose above the median CEO pay for the next largest revenue group of $50 million to $199 million. In the last year, CEO pay in the smallest group jumped 9.3% higher than the previous year, 2022. The difference between these two groups of small companies involved median LTI of 24% higher for the smallest companies.
This finding highlights the focus on LTI awards among emerging growth companies — newer publicly traded companies typically within the technology or life sciences industries. Because of the elevated risk for failure at small, emerging companies, the reward potential is greater, resulting in an elevated level of LTI, often in the form of stock options.
In 2023, LTI represented 76% of total direct compensation (TDC), the highest percentage among the size classes. CEO median salary of the less than $50 million companies remained on par with the median salary for the $50 to $199 million group. However, bonus payments fell 10% to 15% lower than the next largest group to conserve cash and represented the smallest percentage of TDC at 10%.
We anticipate that pay differences across company size and industry will shrink further as executive pay continues to normalize and return to median. These movements will require compensation committees to monitor market rates regularly for CEO pay and for other key talent.
Scrutiny of executive pay will intensify
Scrutiny of generous executive pay packages will intensify with new disclosure regulations. The first disclosures under the Security and Exchange Commission's (SEC's) pay-versus-performance rule for publicly traded, calendar year-end companies began with the 2023 proxy season. Analysts, investors, potential litigants and proxy advisory firms may focus considerable attention on these disclosures, which observers inevitably will compare to company performance measures in the same industry.
Changes to the company's identified performance measures will require additional detail in the narrative to avoid speculation or negative connotation. We expect that any effect of these disclosures on executive pay levels won't surface for another three cycles.
2025 and beyond: The high wire act continues
As compensation committees strive to attract and retain key talent, companies must keep pace with but not jump too far above the market. Some companies will choose to become market leaders and pay a premium to retain key talent. Others will choose to fast follow prevailing market trends to retain key leaders.
Tasked with the delicate balance of competing for and rewarding top talent while not overpaying, the compensation committee further cannot ignore how employees, the public and regulators will perceive its decisions.
At Gallagher, we advocate for a comprehensive and regular review of executive compensation to attract, motivate and retain key talent. Boards of directors must re-evaluate existing programs to ensure they meet the needs of today's evolving workforce. A regular review of compensation objectives must consider emerging geo-social-political practices such as remote positions; multinational leadership structures; environmental, social and governance (ESG); and diversity, equity and inclusion (DEI).
Let Gallagher's team guide your company in developing the executive compensation strategy your organization needs to thrive.
