Executive Compensation
Executive Compensation is the total pay package awarded to a company's senior executives — typically the CEO, CFO, and other named executive officers — including base salary, annual bonuses, long-term equity awards, benefits, and perquisites.
Under SEC rules, public companies must disclose in their annual proxy statement detailed compensation information for the CEO, CFO, and the three other most highly compensated executive officers. This disclosure, called the Summary Compensation Table, breaks pay into base salary, stock awards, option awards, non-equity incentive plan compensation, change-in-pension-value, and all other compensation.
The structure of executive pay has shifted dramatically over the past four decades. Prior to the 1990s, CEO pay was dominated by salary and cash bonuses. Stock options rose to prominence after Section 162(m) of the tax code was added in 1993, limiting the corporate tax deduction for non-performance-based pay above $1 million. While the deductibility rules have since changed, the use of equity as the dominant long-term incentive has persisted. Today, for most large-cap US CEOs, equity awards — particularly performance share units (PSUs) — represent the majority of total compensation.
Proxy advisory firms scrutinize several dimensions of executive pay: alignment of pay with company performance (pay-for-performance), quantum relative to peers, the rigor of performance metrics and targets, the presence of problematic pay practices (tax gross-ups, excessive perquisites, single-trigger change-of-control provisions), and whether the compensation committee operated with appropriate independence.
CEO pay ratios — the ratio of CEO total compensation to median employee compensation — have been mandatory disclosure items since fiscal year 2017 under a Dodd-Frank Act provision. The average pay ratio at S&P 500 companies is several hundred to one, a figure that generates significant public and political attention.
Clawback provisions that allow companies to recover previously paid compensation in cases of misconduct or financial restatement have become a mandatory feature of executive pay programs for listed US companies under SEC rules adopted in 2022.