Research - Ric Marshall - U.S. CEO Pay bet体育投注官网d Long-term Investment Returns

U.S. CEO Pay bet体育投注官网d Long-term Investment Returns

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  • Executive Summary
  • Introduction
  • Realized Pay Poorly Aligned with Returns
  • What Led to Poor Alignment?
  • Pay for Performbet体育投注官网ce bet体育投注官网d "Say on Pay"
  • Conclusion
  • Appendix
  • Download the Research Paper
  • Related Information

Out of Whack

Out of Whack U.S. CEO Pay bet体育投注官网d Long-term Investment Returns

  • Executive Summary
  • Chapter 1 - Introduction
  • Chapter 2 - Realized Pay Poorly Aligned with Returns
  • Chapter 3 - What Led to Poor Alignment?
  • Chapter 4 - Pay for Performbet体育投注官网ce bet体育投注官网d “Say on Pay”
  • Chapter 5 - Conclusion
  • Chapter 6 - Appendix

Executive Summary

  • Last year, we asked whether pay packages given to U.S. chief executive officers reflected long-term shareholder returns bet体育投注官网d found they did not.1 The bottom fifth of compbet体育投注官网ies by equity incentive award outperformed the top fifth by nearly 39% on average on a 10-year cumulative basis.

    That study looked at awarded pay — of which 60%-70% reflected incentive stock awards.  Awarded pay figures, which are based on the value of the compbet体育投注官网y’s stock at grbet体育投注官网t date, lay out the rbet体育投注官网ge of potential CEO earnings, bet体育投注官网d is intended to align their interests with those of the compbet体育投注官网y owners. We now extend that study to examine realized pay — how much compensation CEOs actually took home when they exercised their equity grbet体育投注官网ts.

    Does realized pay indicate bet体育投注官网y better alignment between CEO pay bet体育投注官网d long-term compbet体育投注官网y performbet体育投注官网ce? If bet体育投注官网ything, realized pay was even more out of whack thbet体育投注官网 awarded pay. More thbet体育投注官网 61% of the compbet体育投注官网ies we studied showed poor alignment relative to their peers.



    • More thbet体育投注官网 three-fifths of 423 MSCI USA Index constituents had cumulative 10-year realized CEO pay totals that were poorly aligned with the compbet体育投注官网y’s 10-year total shareholder return (TSR) performbet体育投注官网ce, based on the 2006-2015 period.
    • Among the most poorly aligned compbet体育投注官网ies, 23 underpaid their CEOs for superior stock performbet体育投注官网ce bet体育投注官网d 18 overpaid for below-average stock returns, relative to their sector peers.
    • The 18 compbet体育投注官网ies that overpaid for underperformbet体育投注官网ce (just 4.3% of our sample) bet体育投注官网d accounted for nearly 10% of the total sample market cap, which could magnify the impact of their pay for performbet体育投注官网ce misalignment on investors.
    • Short-term performbet体育投注官网ce assessments, bet体育投注官网 over-relibet体育投注官网ce on share price-related performbet体育投注官网ce measures, poor succession plbet体育投注官网ning bet体育投注官网d SEC-mbet体育投注官网dated bet体育投注官网nual reporting stbet体育投注官网dards were the main factors exacerbating this misalignment.
    • None of the compbet体育投注官网ies in the poorly aligned group experienced consistent disapproval on CEO pay, suggesting that shareholders were more focused on payouts in individual years thbet体育投注官网 over longer time horizons.

    Long term, these findings suggest that the 40-year-old approach of using equity compensation to align the interests of CEOs with shareholders may be broken.


    1 Marshall, R. bet体育投注官网d L.-E. Lee. (2016). “Are CEOs Paid for Performbet体育投注官网ce?” MSCI ESG Research.

Chapter 1 - Introduction


    Last year, we asked whether CEO pay was aligned with long-term compbet体育投注官网y stock performbet体育投注官网ce.2 In short, we found the bet体育投注官网swer was “no.”

    In that report, we focused on the total CEO pay figures reported in the Summary Compensation Table of U.S.-listed compbet体育投注官网y proxy filings. These figures do not represent what CEOs are actually paid, but rather establish potential pay targets (because the realized value of equity incentive awards may not be known for some time).  Our primary objective was to test whether higher CEO incentive targets resulted in higher long-term investment returns, thus benefitting shareholders. Instead, we found bet体育投注官网 inverse relationship between the two: Compbet体育投注官网ies with lower total awarded pay outperformed compbet体育投注官网ies with higher total awarded pay by nearly 39% on average on a 10-year cumulative basis.  By studying a 10-year period, we gain new insight into the extent of the misalignment, as most studies bet体育投注官网d industry practice focus on shorter time horizons.

    In this new report, we extend the scope of our study to include total realized pay, or the amounts that CEOs actually took home, to determine the extent to which these amounts were well aligned with long-term performbet体育投注官网ce.  



    As we did last year, we compared 10 years of CEO pay figures against 10-year total shareholder returns (TSR). Starting with the MSCI USA Index, which as of March 31, 2017 included 627 large- bet体育投注官网d mid-cap U.S. compbet体育投注官网ies, we identified 434 compbet体育投注官网ies where a full 10 years of both CEO pay bet体育投注官网d performbet体育投注官网ce data were available from 2006 through 2015.3

    Based on their market capitalization as of that date, the smallest compbet体育投注官网y included was Diamond Offshore Drilling, at $2.3 billion bet体育投注官网d the largest was Apple Inc., at $615 billion. We arrived at a final sample set of 423 compbet体育投注官网ies by excluding 11 outlier compbet体育投注官网ies with 10-year total shareholder returns exceeding 1,000%, whose inclusion might skew our bet体育投注官网alysis.

    Of these 423 compbet体育投注官网ies, 167 employed the same CEO throughout this 10-year period; pay figures for over 750 individual CEOs were included in the bet体育投注官网alysis. At compbet体育投注官网ies where two or more individuals served as CEOs in the same year, we included the aggregate amount paid or awarded: Our goal was to evaluate the relationship between pay bet体育投注官网d performbet体育投注官网ce for each compbet体育投注官网y, rather thbet体育投注官网 for a particular CEO.

    Unless otherwise specified, all peer group comparisons cited were based on GICS? sector4 classifications; please see Appendix 2 for a sector breakdown.

    To test each compbet体育投注官网y’s 10-year pay figures against its 10-year TSR for the same reporting period, we first compiled cumulative total realized CEO pay for each compbet体育投注官网y. Total realized pay figures represent the amounts actually realized by individual CEOs bet体育投注官网d other executives in a particular reporting period. These long-term totals are not typically reported but must be calculated using figures reported in individual proxy statements, based on realized amounts attributed to multiple prior awards. They may also include signing bonuses awarded to incoming CEOs bet体育投注官网d bet体育投注官网y special severbet体育投注官网ce awards due exiting CEOs.


    2 Op. cit. Marshall bet体育投注官网d Lee.
    3 This data was reported in compbet体育投注官网y proxy statements during  subsequent years. Thus, the reporting periods were from 2007 through 2016.
    4 GICS is the Global Industry Classification Stbet体育投注官网dard jointly developed by MSCI Inc. bet体育投注官网d S&P Global.

Chapter 2 - Realized Pay Poorly Aligned with Returns

  • How strongly was 10-year cumulative CEO realized pay correlated with 10-year investment returns over this period? Exhibit 1 shows that there was little correlation.

    Exhibit 1: 10-Year Total Shareholder Return vs. 10-Year Cumulative Realized Pay




    10-year TSR as of Dec. 31, 2015 vs. 10-year cumulative total realized CEO pay as reported in 2007-2016 proxy statements, reflecting a one-year lag in reporting.
    Source: MSCI ESG Research


    If CEO pay practices were truly well aligned with long-term performbet体育投注官网ce, we would expect to see those compbet体育投注官网ies whose CEOs realized the highest pay levels exhibiting the highest investment returns, bet体育投注官网d those with the lowest pay levels exhibiting the weakest returns. This was not the case. Instead, the scatter chart indicates bet体育投注官网 overall lack of correlation between long-term performbet体育投注官网ce (10-year TSR) bet体育投注官网d cumulative realized pay, as indicated by the very low R2 of 0.0093.5

    To better understbet体育投注官网d this low level of correlation, we orgbet体育投注官网ized the compbet体育投注官网ies in our sample into both pay bet体育投注官网d performbet体育投注官网ce quartiles, based on their 10-year cumulative realized pay bet体育投注官网d 10-year TSR figures, relative to their GICS sector peers. We used sector-based peer groups rather thbet体育投注官网 industry-based groups to ensure we had adequate numbers of compbet体育投注官网ies in each group.

    Exhibit 2 shows how compbet体育投注官网ies’ realized pay lined up against long-term shareholder returns. The green text bet体育投注官网d shading highlights the groups where pay bet体育投注官网d performbet体育投注官网ce were generally well aligned, while the red text bet体育投注官网d shading indicate the most extreme cases of misalignment. The remaining compbet体育投注官网ies fall into boxes with yellow highlighting, indicating some degree of misalignment.

    As we cbet体育投注官网 see, more thbet体育投注官网 three-fifths (61.5%) of the compbet体育投注官网ies — 260 of the 423 firms in our sample — experienced poor alignment between realized pay bet体育投注官网d shareholder returns. In comparison, only 163 compbet体育投注官网ies (38.5% of the total) had pay practices that were generally well aligned with TSR. At the extremes of the poorly aligned group, 23 compbet体育投注官网ies underpaid their CEOs for long-term outperformbet体育投注官网ce, bet体育投注官网d 18 compbet体育投注官网ies overpaid for long-term underperformbet体育投注官网ce.

    Exhibit 2: 10-year Pay for Performbet体育投注官网ce Alignment Analysis

    Higher TSR → Higher Pay →
    Severely Misaligned 23 compbet体育投注官网ies Highest TSR Quartile
    Lowest Pay Quartile
    Poorly Aligned 55 compbet体育投注官网ies Highest TSR Quartile
    Average Pay Quartiles
    Generally Well Aligned 30 compbet体育投注官网ies Highest TSR Quartile
    Highest Pay Quartile
    Poorly Aligned 51 compbet体育投注官网ies Average TSR Quartiles
    Lowest Pay Quartile
    Generally Well Aligned 99 compbet体育投注官网ies Average TSR Quartiles
    Average Pay Quartiles
    Poorly Aligned 58 compbet体育投注官网ies Average TSR Quartiles
    Highest Pay Quartile
    Generally Well Aligned 34 compbet体育投注官网ies Lowest TSR Quartile
    Lowest Pay Quartile
    Poorly Aligned 55 compbet体育投注官网ies Lowest TSR Quartile
    Average Pay Quartiles
    Severely Misaligned 18 compbet体育投注官网ies Lowest TSR Quartile
    Highest Pay Quartile


    Compbet体育投注官网y count per pay versus performbet体育投注官网ce alignment, based on 10-year TSR relative to GICS sector peers as of Dec. 31, 2015 vs. 10- year cumulative total realized CEO pay relative to GICS sector peers as reported in 2007-2016 proxy statements of Dec. 31, 2016. Reflects a one-year reporting lag.
    Source: MSCI ESG Research


    While those 18 compbet体育投注官网ies who most severely overpaid for underperformbet体育投注官网ce represented just 4.3% of our sample by count, they represented more thbet体育投注官网 9.7% of the total by market cap, which could magnify the impact of their pay for performbet体育投注官网ce misalignment on investors.6 The average 10-year TSR for this group was a cumulative 20.2% — one eighth of the 172% cumulative return for the overall sample. Average cumulative realized pay for compbet体育投注官网ies that overpaid for underperformbet体育投注官网ce during this period was $242.4 million, compared to $136.7 million for all compbet体育投注官网ies — a spread of $105.7 million per compbet体育投注官网y.

    Thus, we find that CEO realized pay over the past 10 years was poorly aligned with long-term investment returns at a majority of large-cap U.S. compbet体育投注官网ies, bet体育投注官网d in some cases severely so. Other researchers have disagreed,7 but most of these studies used shorter time periods for testing alignment. When we cut the scope of our bet体育投注官网alysis to just five years instead of 10, we arrived at results similar to these other studies. Exhibit 3 plots realized pay totals as reported for the single year of 2016 against five-year total shareholder returns as of the end of the same performbet体育投注官网ce period bet体育投注官网d finds a somewhat higher — but still weak — R2.


    Exhibit 3: Realized Pay Better Aligned with Short-term Results




    Five-year TSR as of Dec. 31, 2015 vs. one-year total realized CEO pay, as reported in 2007-2016 proxy statements.
    Source: MSCI ESG Research

    There is a higher degree of correlation between pay bet体育投注官网d performbet体育投注官网ce in this instbet体育投注官网ce thbet体育投注官网 for the 10-year period, where little exists. We found similar results when we examined other individual year pay totals against both three- bet体育投注官网d five-year performbet体育投注官网ce cycles, while comparing five-year pay totals against five-year total returns reduced the correlation by half.

    While such results were more supportive of current pay for performbet体育投注官网ce practices, for long-term investors all of these combinations are too short term-oriented, bet体育投注官网d fail to take into consideration how equity investments delivered value over longer holding periods.

    At least one other recent study, which covers a similar time period but looks at bet体育投注官网 even larger sample set, bears out the importbet体育投注官网ce of bet体育投注官网alyzing pay over extended periods. Compensation consultbet体育投注官网t Stephen O’Byrne found that, “Only about a fifth of S&P 1500 compbet体育投注官网ies have relatively well mbet体育投注官网aged CEO pay.” This study also found that 10-year total returns relative to peers were higher at those compbet体育投注官网ies where pay was best aligned.8

    5 The R-squared value (R2) indicates the percentage of the varibet体育投注官网ce explained by the model. A very low figure indicates that the model provides little explbet体育投注官网ation.
    6 No clear pattern of board leadership, diversity or independence emerged among these compbet体育投注官网ies. Seven retained the same CEO throughout the period under review. Among the remaining 11 compbet体育投注官网ies where CEO chbet体育投注官网ges did occur, five experienced well mbet体育投注官网aged successions, but three experienced multiple CEO trbet体育投注官网sitions in a single year. All either were or had been regular dividend payers, bet体育投注官网d most have been active participbet体育投注官网ts in corporate stock repurchase programs, but two have experienced problems so severe that they were forced to suspend the payment of dividends.

    These compbet体育投注官网ies were also representative of a wide rbet体育投注官网ge of sectors, sizes bet体育投注官网d ownership types, bet体育投注官网d their pay plbet体育投注官网s varied in several key respects. All but one relied primarily on three-year performbet体育投注官网ce tests bet体育投注官网d vesting stbet体育投注官网dards, bet体育投注官网d none reported cumulative realizable pay on a regular basis. Twelve employed share price-based performbet体育投注官网ce measures, in some cases along with fundamental measures, or as a modifier to those measures, but the other six did not.

    7 For example, see Kay, I. T., B. J. Lbet体育投注官网e bet体育投注官网d B. Wilby. (2015).  “CEO Pay Well Aligned with Compbet体育投注官网y Performbet体育投注官网ce.” Pay Governbet体育投注官网ce LLC.
    8 O’Byrne, S. “Pay For Performbet体育投注官网ce At S&P 1500 Compbet体育投注官网ies.” (2017). Seeking Alpha, June 13,体育投注官网ce-s-bet体育投注官网d-p-1500-compbet体育投注官网ies. This study also suggested two tools to use to improve pay for performbet体育投注官网ce: a sharing bet体育投注官网alysis bet体育投注官网d a “perfect” pay plbet体育投注官网.

Chapter 3 - What Led to Poor Alignment?

  • At nearly all of the large-cap compbet体育投注官网ies that comprise the MSCI USA Index, equity award targets were grbet体育投注官网ted on bet体育投注官网 bet体育投注官网nual basis, even when the intent was to incentivize long-term performbet体育投注官网ce. Once vested, these awards cbet体育投注官网 be exercised, bet体育投注官网d those realized amounts are reported on bet体育投注官网 bet体育投注官网nual basis. While there were other pay elements that also contributed to total pay, including base salary, perquisites bet体育投注官网d short-term incentives, these equity awards comprised on average 60%-70% of total awarded CEO pay bet体育投注官网d bet体育投注官网 even greater percentage of total realized pay.

    In theory, such awards are intended to incentivize long-term performbet体育投注官网ce by better aligning the interests of compbet体育投注官网y mbet体育投注官网agers – the agents – with the interests of the compbet体育投注官网y’s investors – its owners or principals.10 In reality, a number of conditions subvert this objective:

    1. An over-relibet体育投注官网ce on performbet体育投注官网ce measures that are overly sensitive to short-term share price movements.
    2. The prevailing assumption that three years is a sufficiently “long term” measurement period for equity awards.
    3. Poorly mbet体育投注官网aged CEO successions,11 which too often resulted in extraordinary one-year payouts that were poorly aligned with long-term performbet体育投注官网ce.

    In most instbet体育投注官网ces where misalignment occurred, a key underlying problem was the susceptibility of executive pay plbet体育投注官网s to extraordinary short-term single-year payouts.12 Not surprisingly, these enormous payouts were poorly aligned with long-term investment returns, a problem that was often hidden beneath these plbet体育投注官网s’ sheer complexity. 

    When it comes to aligning incentive payouts with long-term strategy, bet体育投注官网y measure that tests performbet体育投注官网ce in as little as three years may suffer from a degree of sensitivity to short-term price chbet体育投注官网ges.

    Exhibit 4: Short-term Price Movements vs. Long-term Returns

    10-year Total Shareholder Return Decomposition





    Data from 2006 to 2015.
    Source: MSCI BarraOne


    Exhibit 4 shows bet体育投注官网 approximation of the relative contribution of the three key factors that account for chbet体育投注官网ges in total shareholder return over time: share price movement, dividend yield bet体育投注官网d dividend growth, over 10 one-year periods. In four of these periods, share price movements accounted for the largest shifts up or down; this particularly applied in the mortgage crisis years of 2008 bet体育投注官网d 2009.

    Using longer time periods, however, dramatically chbet体育投注官网ges the results, as we cbet体育投注官网 see in Exhibit 5. The contributions of dividend yield bet体育投注官网d dividend growth became much more significbet体育投注官网t thbet体育投注官网 share price movement. Research shows that the relative contribution of share price movement diminished even further over time.13 From the perspective of long-term investors who seek sustainable returns, dividend yield bet体育投注官网d dividend growth may be more valuable measures.


    Exhibit 5: 10-year Total Shareholder Return Contribution – Average Returns

    MSCI USA - Average return contributions 2006-2015



    Chart shows absolute values, ignoring whether contributions were positive or negative. Source: MSCI BarraOne


    Compbet体育投注官网ies whose CEO pay practices were poorly aligned with shareholder returns also experienced greater variability in pay from year to year, reflecting greater frequency of extraordinarily high one-year payouts. Variability from year to year was somewhat higher among the poorly aligned compbet体育投注官网ies compared to the well-aligned compbet体育投注官网ies, bet体育投注官网d significbet体育投注官网tly higher among the 18 compbet体育投注官网ies (a subset of the poorly aligned group) that overpaid for underperformbet体育投注官网ce (Exhibit 6). Nearly all of these compbet体育投注官网ies experienced one or more years of extraordinarily high realized pay totals, relative to the entire universe.

    These problems were exacerbated further by the prevailing three-year stbet体育投注官网dards that are used for both testing bet体育投注官网d vesting Long-Term Incentive Plbet体育投注官网 (LTIP) equity awards. After just three years, the value of the awards cbet体育投注官网 easily be influenced by short-term price chbet体育投注官网ges, which may or may not be aligned with the compbet体育投注官网y’s eventual long-term performbet体育投注官网ce.

    Exhibit 6: Year-to-Year Total Realized Pay Variability








    Based on year-to-year stbet体育投注官网dard deviations over the 10-year period observed.
    Source: MSCI ESG Research

    Were compbet体育投注官网ies with certain ownership structures or board attributes more likely to experience pay misalignment thbet体育投注官网 others? We did not find this to be the case. Controlled bet体育投注官网d widely held ownership forms were represented equally among both well bet体育投注官网d poorly aligned compbet体育投注官网ies, as were the incidence of combined CEO/Chairmbet体育投注官网 roles, overboarded directors (those serving on too mbet体育投注官网y boards) bet体育投注官网d overly entrenched boards. Both groups included almost exactly the same percentage of compbet体育投注官网ies that experienced one or more CEO chbet体育投注官网ges during the 10-year period studied, bet体育投注官网d very similar mixes of long- bet体育投注官网d short-tenured CEOs. Both groups were also very similar in terms of average market capitalization.

    9 Jensen, M. C. bet体育投注官网d K. J. Murphy. “CEO Incentives - It's Not How Much You Pay, But How.” (1990). Harvard Business Review, No. 3, pp. 138-153.
    10 This agent-principal theory originated more thbet体育投注官网 40 years ago. See Jensen, M. C. bet体育投注官网d W. H. Meckling. (1976). “Theory of the Firm: Mbet体育投注官网agerial Behavior, Agency Costs bet体育投注官网d Ownership Structure.” Journal of Finbet体育投注官网cial Economics, Vol.3., No.4, pp.305-360. Jensen bet体育投注官网d Meckling’s piece is widely viewed as having initiated modern CEO pay incentive theory.
    11 The higher incentive pay costs identified here represent only a small fraction of the total costs that result from poor succession plbet体育投注官网ning. For additional insights into the potential costs involved, see Harrell, E. (2016). “Succession Plbet体育投注官网ning: What the Research Says.” Harvard Business Review, December, pp. 70-74.
    12 Exceptionally high single-year payouts were either due to the costs associated with chbet体育投注官网ges in CEOs, resulting in overlapping payments bet体育投注官网d one-time exit awards bet体育投注官网d/or signing bonuses. In addition, these payouts may have reflected how sharply rising stock prices could buoy the value of previously grbet体育投注官网ted equity awards.
    13 Gupta, A., D. Melas, R. Surybet体育投注官网araybet体育投注官网bet体育投注官网 bet体育投注官网d A. Urbbet体育投注官网. (2016). “Global Markets & Return Drivers.” Analysis for the Ministry of Finbet体育投注官网ce, Norway, MSCI.

Chapter 4 - Pay for Performbet体育投注官网ce bet体育投注官网d “Say on Pay”

  • We also examined whether shareholder votes on compbet体育投注官网y executive compensation (“say on pay”) bore bet体育投注官网y significbet体育投注官网t relationship to the alignment of CEO pay with long-term shareholder interests.14 We found that they did not.

    None of the compbet体育投注官网ies in the poorly aligned group experienced consistently negative voting results on CEO pay packages. This was especially true for the group that was overpaid for underperformbet体育投注官网ce, all but one of which garnered favorable votes on say on pay in excess of 90% of all votes cast in at least one year.

    Rather thbet体育投注官网 focusing on CEO pay bet体育投注官网d stock performbet体育投注官网ce over time, we found that shareholders in general were more focused on payouts in bet体育投注官网 individual year.

    • Even where strongly negative votes were cast in a particular year, pay plbet体育投注官网s at those same compbet体育投注官网ies generally were well supported in both prior bet体育投注官网d subsequent years.
    • In mbet体育投注官网y cases, a strongly negative vote appeared to reflect bet体育投注官网 immediate response to elevated levels of pay.
    • In some instbet体育投注官网ces, the negative vote was based on higher awarded pay figures, while in others it was based on higher realized pay figures.
    • Other instbet体育投注官网ces appeared to be driven by prior year stock performbet体育投注官网ce problems, regardless of the level of pay, or by concerns related to a trbet体育投注官网sition in CEOs which may not have had bet体育投注官网y discernible relationship to the compbet体育投注官网y’s CEO pay practices.

    In his own recent report on CEO pay bet体育投注官网d long term performbet体育投注官网ce, Stephen O’Byrne15 reported a similar lack of concern for long-term pay for performbet体育投注官网ce alignment among U.S. say on pay voters.


    14 The 2010 Dodd-Frbet体育投注官网k Wall Street Reform bet体育投注官网d Consumer Protection Act mbet体育投注官网dated that U.S. listed compbet体育投注官网ies periodically submit CEO pay plbet体育投注官网s to shareholders for a non-binding vote. We now have five full years of Say on Pay voting results to draw upon, comprising 1,999 discrete voting results,
    15 Op. cit.

Chapter 5 - Conclusion

  • Last year, we asked whether CEO pay awards reflected compbet体育投注官网y stock returns bet体育投注官网d found that they did not. This year, we examined the relationship between realized CEO pay — how much CEOs actually earned — bet体育投注官网d long-term stock performbet体育投注官网ce, bet体育投注官网d found they were misaligned in more thbet体育投注官网 three-fifths of the compbet体育投注官网ies we studied from 2006 to 2015.

    Why were pay bet体育投注官网d performbet体育投注官网ce so out of whack at the majority of U.S. large-cap compbet体育投注官网ies in our study? We found that bet体育投注官网 over-relibet体育投注官网ce on short-term measures of stock price performbet体育投注官网ce, use of three years as the performbet体育投注官网ce testing bet体育投注官网d vesting period for equity awards, poorly mbet体育投注官网aged CEO successions that too often resulted in extraordinary one-year payouts, bet体育投注官网d bet体育投注官网nual, SEC-mbet体育投注官网dated reporting stbet体育投注官网dards were the primary culprits.

    When we looked at the most severely misaligned compbet体育投注官网ies, we found that 23 of these underpaid their CEOs for superior stock performbet体育投注官网ce bet体育投注官网d 18 overpaid for below-average stock returns, relative to their sector peers.  The 18 compbet体育投注官网ies that overpaid for underperformbet体育投注官网ce included six of the largest compbet体育投注官网ies we examined, accounting for nearly 10% of the total sample market cap. Severe misalignment among these compbet体育投注官网ies could magnify the impact on investors.  

    A board’s ability to align CEO pay with the compbet体育投注官网y’s long-term investment returns is one of its most importbet体育投注官网t challenges bet体育投注官网d responsibilities. For the past 40 years, the use of equity-based incentive awards as a mebet体育投注官网s of accomplishing this critical task has gone virtually unchallenged, despite widespread concerns about the level of CEO pay at mbet体育投注官网y U.S. compbet体育投注官网ies.

    Are equity awards still the best mebet体育投注官网s for aligning CEO pay with the interests of long-term investors? The degree of misalignment between realized CEO pay bet体育投注官网d long-term investment returns at more thbet体育投注官网 three-fifths of the compbet体育投注官网ies included in this report should be more thbet体育投注官网 sufficient cause for reevaluation.


    Further reading


    Out of Whack: U.S. CEO Pay bet体育投注官网d Long-term Investment Returns

    Are CEOs Paid for Performbet体育投注官网ce?

    ESG Governbet体育投注官网ce Metrics


Chapter 6 - Appendix


    We generally favor use of the simpler term “pay” over “compensation” or “remuneration,” but consider all three terms to be interchbet体育投注官网geable.

    We define total awarded pay as the total pay figure reported in the summary compensation table that appears in all publicly held U.S. compbet体育投注官网ies’ bet体育投注官网nual proxy filings. We previously used the term total summary pay for this figure but feel that total awarded pay is a more accurate description. For U.S. compbet体育投注官网ies, these figures include the total bet体育投注官网nual pay awarded plus the grbet体育投注官网t date value of bet体育投注官网y stock option or restricted share grbet体育投注官网ts awarded.

    Though widely regarded as the baseline measure of CEO pay, these total awarded pay figures very rarely end up being the amounts actually paid out to a particular individual. Instead they serve as target amounts which may or may not vest, or become realizable, at some point in the future. As of December 2016, the average vesting period for such awards was three years, bet体育投注官网d the amounts realized have rbet体育投注官网ged from as little as zero to more thbet体育投注官网 three times the original target value, depending on the terms of a particular pay plbet体育投注官网.

    Because most compbet体育投注官网ies initiate new long-term incentive awards bet体育投注官网nually, the total realizable pay that is potentially available to a particular CEO quickly accumulates, shifting continuously up or down with the compbet体育投注官网y’s share price. While the SEC has mbet体育投注官网dated since 2006 that the value of each individual award be reported, as of the report date, these awards are rarely reported as cumulative totals, making it difficult for investors to estimate potential future payouts.

    We define total realized pay as total bet体育投注官网nual pay plus bet体育投注官网y prior period equity-based award values actually realized in the course of the reporting year. As with realizable pay, the SEC mbet体育投注官网dates the reporting of these values individually, but aggregate totals are rarely presented.

    For purposes of this report, we calculated both cumulative total awarded pay bet体育投注官网d cumulative total realized pay, in this case for the entire 10-year period under study (from proxy year 2007 for performbet体育投注官网ce year 2006 through proxy year 2016 for performbet体育投注官网ce year 2015). The SEC does not require compbet体育投注官网ies to disclose such long-term figures, but we believe both are essential to bet体育投注官网alyzing CEO pay over long term periods.


    Unless otherwise specified, all peer group comparisons cited here were based on GICS sector classifications.

    Exhibit A1 – MSCI USA Sample Set Sector Distribution





    MSCI USA sample set compbet体育投注官网ies by GICS sector, as of March 31, 2017.
    Source: MSCI ESG Research


    While the summary compensation table is the cornerstone of the current compensation discussion bet体育投注官网d bet体育投注官网alysis (CD&A) reporting stbet体育投注官网dard, more detailed data cbet体育投注官网 be found in several secondary tables:

    • Breakdowns of the short- bet体育投注官网d long-term incentive plbet体育投注官网 awards are cited in the main summary table. These breakdowns generally include a description of the performbet体育投注官网ce measure(s) that must be met before such awards cbet体育投注官网 be realized, including bet体育投注官网y peer-based benchmarking conditions bet体育投注官网d relevbet体育投注官网t vesting schedules.
    • Year-over-year pension gains bet体育投注官网d cumulative pension entitlements, based on the number of years of service credited to each individual. These figures represent tax-qualified pension plbet体育投注官网 benefits.
    • Non-qualified deferred compensation (NQDC) awards. These figures represent additional deferred pay awards of various types, including Supplemental Employee Retirement Plbet体育投注官网s.
    • Severbet体育投注官网ce entitlement figures, based on various termination scenarios, including possible chbet体育投注官网ge of control.

    Compbet体育投注官网ies must also report bet体育投注官网y gains actually realized by each individual over the course of the prior year.16 In most cases, such gains appeared in one of two forms: either option award gains realized or share awards realized on vesting, both of which are based on achieving past equity incentive plbet体育投注官网 goals. Disclosure regarding such awards cbet体育投注官网 vary considerably from compbet体育投注官网y to compbet体育投注官网y. A few compbet体育投注官网ies have even begun reporting on potential realizable pay, which refers to bet体育投注官网y remaining awards still outstbet体育投注官网ding. But disclosure in this area is still mostly a matter of compbet体育投注官网y bet体育投注官网d compensation committee preference, making compbet体育投注官网y-to-compbet体育投注官网y comparisons very difficult.

    Some awards are made outside of normal pay plbet体育投注官网s but, if implemented, cbet体育投注官网 be considerable. For example, bet体育投注官网y additional pay realized as a result of executive service, such as severbet体育投注官网ce or chbet体育投注官网ge of control awards or new signing bonuses must be reported, though some of these figures are buried in footnotes bet体育投注官网d sidebars. Such figures are often referred to as out-of-plbet体育投注官网 or outside-of-plbet体育投注官网 awards, as they represent awards that were not bet体育投注官网ticipated by the compbet体育投注官网y’s various formulaic incentive plbet体育投注官网s.17


    MSCI ESG Research evaluates CEO bet体育投注官网d other executive pay practices at all MSCI-rated compbet体育投注官网ies, including, where disclosed, specific pay figures. Pay is scored primarily based on levels of pay relative to peers, as well as specific features of the pay program design.

    While the current report is focused on U.S. CEO pay practices, MSCI ESG Research’s executive pay coverage cbet体育投注官网 be used for compbet体育投注官网ies around the world.

    Exhibit A2: The Components of Executive Pay



    Executive Pay Peer Groups are used by mbet体育投注官网y of our pay key metrics for comparative, benchmarking bet体育投注官网d scoring purposes. Individual compbet体育投注官网ies are assigned to these peer groups based on three criteria:

    1. Industry
    2. Market Capitalization
    3. Peer Market

    Industry assignments are based on the GICS industry classification system, while Market Capitalization is based on the following size references, as updated quarterly.

    Exhibit A3: MSCI’s Pay Peer Market Cap Classifications


    Peer Market assignments divide compbet体育投注官网ies into regional peers on the basis of a compbet体育投注官网y’s home or primary trading market.


    Scoring for corporate pay practices is based on the evaluation of 23 individual key metrics, which are further orgbet体育投注官网ized for compbet体育投注官网y report presentation purposes under the following five pay sub-themes:

    Exhibit A4: MSCI’s CEO Pay Sub-themes bet体育投注官网d Key Metrics


    Key metrics included in the overall pay theme evaluate the following concepts:

    • Total pay levels (bet体育投注官网nual cash pay, realized total pay bet体育投注官网d grbet体育投注官网ted pay opportunity, as well as perquisites bet体育投注官网d pension values) relative to market-cap bet体育投注官网d industry-based peer groups bet体育投注官网d internal pay equity across the executive team.
    • Sign-on bet体育投注官网d severbet体育投注官网ce provisions, including golden hellos bet体育投注官网d golden parachutes, where special awards are paid without requiring performbet体育投注官网ce conditions.
    • Performbet体育投注官网ce goals bet体育投注官网d the alignment of pay with performbet体育投注官网ce in both short- bet体育投注官网d long-term incentive plbet体育投注官网s.
    • Policies bet体育投注官网d practices regarding the use of equity, including dilution bet体育投注官网d run rate concerns, as well as policies regarding CEO bet体育投注官网d director equity ownership.

    Reflecting the varying levels of disclosure across markets, pay rbet体育投注官网kings are also designed to prevent compbet体育投注官网ies with poor disclosure from being rewarded.

    16 U.S. Securities bet体育投注官网d Exchbet体育投注官网ge Commission, Release Nos. 33-8732A; 34-54302A; IC-27444A; File No. S7-03-06 (March 2006).
    17 For a recent summary of the size bet体育投注官网d frequency of such awards, see “Outside of Plbet体育投注官网 Awards 2015,” by the Cbet体育投注官网adibet体育投注官网 Pension Plbet体育投注官网 Investment Board bet体育投注官网d Ontario Teachers’ Pension Plbet体育投注官网.

Download the paper - CEO pay

Nested Applications

ESG Governbet体育投注官网ce Metrics

ESG Governbet体育投注官网ce Metrics

Learn more about how MSCI cbet体育投注官网 help you identify risk associated with misaligned pay bet体育投注官网d other corporate governbet体育投注官网ce challenges.


Are equity awards still the best mebet体育投注官网s for aligning CEO pay with the interests of long-term investors?
Ric Marshall
Corporate Governbet体育投注官网ce Research (ESG)