Global CEO Paywatch - Trends in Executive Compensation

In recent years, investors, academics and non-governmental organisations along with the general public have become increasingly concerned about executive compensation practices deemed to be excessive. Indeed, executive compensation has increased at a rapid pace since the 1980’s. This has occurred against a backdrop of increasing inequalities in income distribution in OECD countries. Policymakers, along with investors across the globe, have reacted to varying degrees. In some countries, policymakers have adopted laws requiring companies to hold Say-on-Pay votes, publish CEO-to-worker pay ratios or limit bonuses. Pension funds are increasingly using their ownership rights to voice discontent when executive compensation packages are considered excessive.

Below, you will find information on efforts being undertaken in Australia, Canada, the UK and the US to rein in excessive compensation practices. Measures are recommended for pension trustees wishing to act on the issue of executive compensation practices. Also, see the Global CEO Paywatch table with the salaries of the top 10 paid CEO’s in Australia, Canada and the US and the result of Say-on-Pay votes demonstrating increasing discontent by investors.

  1. 1. Trends in executive compensation and income inequalities
  2. 2. Why has executive compensation increased so much?
  3. 3. The reaction to excessive executive compensation
  4. 4. Impact of Say-on-Pay votes on executive compensation
  5. 5. Next steps for pension trustees

Trends in executive compensation and income inequalities

In recent decades, executive pay has risen dramatically across industries and across the globe. For example, in 1982, in the United States, the CEO-to-worker pay ratio was 42:1, a ratio which rose to 354:1 in 2012[i]. Concurrently, inequality in the distribution of incomes increased in almost all OECD countries between the mid 1980’s and now[ii]. Below, the table demonstrates the evolution of the average income earned by the top 0.1% earners (representative of executive incomes without capital gains[iii]) relative to the income of the bottom 90% earners (reflective of average incomes) in selected OECD countries[iv]:


Why has executive compensation increased so much?

Many arguments have been advanced to explain the increase in executive pay. Among the most prominent are the following:

  • Global market for “star” executives: Over the last decades, globalisation (e.g.: improvements in information technology, increased commercial and financial integration) has transformed the market for star executives from a national into a global one. Employers want the best person in the world and compete with compensation in other jurisdictions to attract “star” executives[v];
  • The widespread adoption of performance-based compensation packages: Since the late 1980’s, academics and shareholders pushed for increased performance based pay incentives, often in the form of stock options. These packages were supposed to increase performance sensitivity. Because part of their pay was now “at risk”, the level of compensation was increased to compensate for “risk”[vi];
  • Changes in the nature of the CEO job: increased outside hires, increased likelihood of being fired and an increased emphasis on general rather than firm-specific skills has increased opportunities for CEO mobility and led to an increase in compensation to attract best talents [vii][viii][ix];
  • Interlocked directorates: A director may serve on the board of multiple corporations or an executive of one firm may sit on the board of another firm and vice-versa. This interconnectedness between boards of directors and executives across large corporations may result in complacent behaviour when it comes to setting executive compensation. Compensation committees wishing to remain collegial with the executives may thus set excessive compensation packages that are not tied to performance[x].

The reaction to excessive executive compensation

The rise in executive compensation has received increasing attention since the 1990’s for two main reasons:  First, several highly publicised cases of excessive compensation packages for executives have been linked to well-known scandals in the US (e.g.: Enron) and in the UK (e.g.: Prudential and Vodafone).  Second, the global financial crisis drew public attention to the issue of compensation practices in the financial sector. These events occurred against a backdrop of growing income inequality in OECD countries[xi].

Investors and policymakers have reacted to excessive compensation practices. In 2002, the UK was the first country to pass legislation mandating a non-binding shareholder vote on executive compensation. The aim of the Say-on-Pay vote was to improve “accountability, transparency and performance linkage of executive pay”[xii]. Similar measures were taken in the United States and Australia in 2010 and 2011 respectively. In other jurisdictions where Say-on-Pay is not yet mandatory, like Canada, investors have put increased pressure on companies to hold such votes. As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act a measure is being considered requiring companies to report on CEO-to-worker pay ratios. At the same time, the European Union’s European Banking Authority has released draft rules blocking bonuses of more than double fixed pay.

Impact of Say-on-Pay votes on executive compensation

Say-on-Pay votes have had several impacts on CEO compensation. In the UK, where Say-on-Pay votes have been held at public companies’ annual general meetings since 2002, a study found that firms have responded to rejection votes by scaling back CEO pay practices that rewarded failure (e.g.: generous severance contracts) and increasing the sensitivity of pay to poor firm performance[xiii]. In the US, where mandatory votes were signed into law in 2010, evidence is starting to emerge regarding the impact of the votes on CEO compensation. A study has found that boards of directors have reacted to Say-on-Pay  rejection by reducing compensation, thereby suggesting that such votes are an effective mechanism to address problems of excessive compensation packages[xiv]. In Australia, increased investor scrutiny since the financial crisis combined with the ‘two strikes’ rule in Say-on-Pay votes has resulted in decreased average CEO fixed pay in the Top 100 companies in 2012 year-over-year[xv]. Evidence also suggests that certain institutional investors, such as public sector pension funds, are more likely to be associated with Say-on-Pay rejection votes[xvi].

Global CEO Paywatch table: See the results of Say-on-Pay votes for the top 10 paid CEO's in Australia, Canada and the United States

Next steps for pension trustees

Studies demonstrate that an increase in shareholder voice is indeed contributing to curbing excessive pay practices. As a result of growing awareness of the risks of excessive executive compensation, pension trustees and their funds are increasingly taking the following actions:

  • Closely monitoring the link between pay and performance at companies held in their portfolios to ensure the good stewardship of the pension savings of plan beneficiaries;
  • Demanding that their fund managers report on their proxy voting records and provide a rationale for supporting or opposing each Say-on-Pay vote; and
  • Publicly urging securities regulators to require companies to hold Say-on-Pay votes - either binding or advisory – and to disclose the ratio of CEO pay to average worker pay.



[ii]OECD (2011). “Divided We Stand: Why Inequality Keeps Rising”, OECD Publishing. p.23

[iii]Executives, managers and financial professions make up for 59% of the top 0.1% income group.

[iv]There is no reliable way to measure the evolution of CEO-to-worker pay over time; the table above is a used as a proxy to demonstrate relative change in executive-to-worker compensation

[v] Atkinson, A.B. (2008), The Changing Distribution of Earnings in OECD Countries, Oxford University Press,Oxford.

[vi] OECD (2011). “Divided We Stand: Why Inequality Keeps Rising”, OECD Publishing. P.360

[vii]Garicano, Luis, and Esteban Rossi-Hansberg (2006), “Organization and Inequality in a Knowledge Economy,” Quarterly Journal of Economics, 121, p.1383–1435.

[viii]Giannetti, Mariassunta (2006).  “Serial CEOs’ Incentives and the Shape of Managerial Contracts,” mimeo, Stockholm School of Economics

[ix]Frydman, Carola (2005). “Rising through the Ranks. The Evolution of the Market for Corporate Executives, 1936–2003,” mimeo, Harvard University.

[x] Bebchuk, L & Fried, J. (2004). “Pay without performance: The unfulfilled promise of executive compensation”, Harvard University Press: Cambridge.

[xii]Baird, J. and Stowasser, P. (2002) Executive compensation disclosure requirements: the German, UK, and US approaches,, PLC Document 4-101-7960, September 23.

[xiii]Ferri. F, Maber. D. (2013). “Say on Pay votes and CEO compensation: Evidence from the UK”, Review of Finance, 17, p.527-563.

[xiv]Kimbro, M & Xu, D. (2013). “Shareholders have a say on executive compensation: evidence from Say on Pay in the United States”, Working Paper Series.

[xv] Pay in Top 200 Companies 2012 EMBARGOED Sep13.pdf, accessed 20 Sept 2013

[xvi] Kimbro, M & Xu, D. (2013). “Shareholders have a say on executive compensation: evidence from Say on Pay in the United States”, Working Paper Series.

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