Executives — be they of the executive, general, financial or several other kinds — are key players and decision makers in the world of business. They're typically responsible for major tasks, playing a uniquely pivotal role in both forming and implementing a business' strategy and goals. In short, executives are vital employees, almost to the point of being irreplaceable. As such, they're often generously compensated for their efforts and expertise.
During the COVID crisis, however, many executives took a pay cut due to economic downturn caused by the pandemic. Some CEOs went for several months without receiving any salary whatsoever to avoid mass layoffs. This included 33% of S&P 500 companies, as The Wall Street Journal reported at the time. Furthermore, roughly 50% of S&P 500 CEOs made $1.2 million or less for the year as a whole.
More than two years removed from the lockdown measures, however, and amid a surge in hiring stemming from the so-called Great Resignation, executives are back to earning the wages to which they're more accustomed. This suggests companies may have to dive deeper into their coffers to retain and recruit their indispensable executives.
By virtually every statistical measure — and among several different sources that track executive earnings trends — business executives have seen their salaries swell considerably over the last couple of years. This is particularly true among S&P 500 companies. In 2020, for example, the median salary for executives leading S&P 500 companies was unchanged from the previous year, according to Compensation Advisory Partners data obtained by Fortune magazine. In 2021, however, executive pay rose nearly 20%. This compares to an economy-wide hourly wage increase of 4.7% last year, as The Washington Post reported from Labor Department figures.
Why has executive compensation risen so appreciably?
From productivity declines to lower gross domestic product to job loss, the global economy took a beating in 2020. During the height of the pandemic — meaning from the first nine months of 2020 — over 9.5 million Americans lost their jobs, according to government figures analyzed by the Pew Research Center. That was more than all of the countries represented in the European Union.
Because of this fact, it seems unusual that executives would receive such a substantial increase in compensation given how long it can take for businesses to recover financially.
The reason why executives' pay surged as much as it did, according to the analysis done by Compensation Advisory Partners, stems from the C-suite's better-than-expected performance given the circumstances that COVID created. This enabled executives to receive bonus pay, as stipulated in their contracts. Indeed, 2021 saw a 73% increase in payouts from annual incentives, while base salaries among all employees climbed a more modest 11%.
In certain respects, compensation surveys such as these are similar to opinion surveys, in that they represent a snapshot of data used to identify trends. This means that other studies may have different results, depending on how large their sample size is. For example, while executive pay was largely unchanged for a large segment of S&P 500 organizations in 2020, the median pay for the nation's 300 largest public companies that year was $13.7 million, The Wall Street Journal reported. In 2019, the median among these companies was $12.8 million.
However, several other analyses on executive compensation reveal similar overall findings to those of Compensation Advisory Partners. This includes a study published in the Harvard Law School Forum on Corporate Governance, which found that median total direct compensation for executives in the study — which involved the 500 largest public companies in the U.S. — rose to $14.3 million in 2021. That's an increase of 20% from $12 million in 2020.
Additionally, a survey done by Pay Governance shows a general uptick in what executives are making after an unusual 2020. The following year, meaning 2021, total direct compensation for executives rose between 1% and 8%, the study found, with some companies handing larger long-term incentive grants in the wake of COVID-19. While many companies struggled during the pandemic — particularly small-business owners — multinational corporations thrived, thus triggering the payouts that resulted from achieving certain goals or earnings milestones.
Financial losses weren't as bad as feared
But some bonus pay for executives is a product of not necessarily improving, but beating expectations. A classic example is Foot Locker, the athletic footwear and apparel company. As reported by CBS News at the time, due to the highly unusual nature of the year — and the supply chain disruptions that followed — Foot Locker expected a financial setback in 2020, after initially anticipating a strong year. Given this, the apparel company set a goal of not allowing sales to fall below a certain threshold.
While Foot Locker did wind up with lower revenues and profits compared to 2019, the drop was less significant than the company anticipated. This enabled Foot Locker's CEO to receive a $3.8 million cash bonus, a 30% increase from what he earned in 2019.
In other cases, growth in executives' pay was linked to contract extensions. This includes the CEO of Norwegian Cruise Line Holdings, whose earnings doubled in 2021 despite the company recording a $4 billion loss in the 2020 fiscal year, according to the Journal. The CEO was still paid more because he inked a three-year contract extension and Norwegian Cruise Line didn't finish as deeply in the red as anticipated.
It's important to properly compensate executives in a manner that both rewards their performance and encourages them to stay with the company. But in a highly volatile economic environment where inflation rages, you may not be able to set aside the funds that would normally go toward the salary or bonuses of your all-important C-suite personnel. Life Insurance premium financing can serve as a potential long-term funding solution in those cases. Premium financing is a life insurance-based approach to funding your business-related obligations. So in addition to paying for the premiums of a life insurance policy for group life insurance, premium financing can also be used for deferred executive compensation, key-person financing, buy-sell agreements and many other business planning needs. Contact Global Financial Distributors for additional information on Leveraged Planning®.