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Giving the leaders their due: achieving balance between executive pay and corporate governance


Striking the right balance on executive pay

Published 13 October 2022 in Leadership • 7 min read

Boards should see shareholder rejections of inflated CEO compensation as a serious warning of the social and commercial dangers of payinequity.

Shareholders’ rejection of CEO pay packages is now headline news. JP Morgan Chase’s CEO Jamie Dimon, GE’s CEO Larry Culp and Intel’s CEO Pat Gelsinger have all seen shareholders vote down their proposed pay packets in the past two yearsand they are not alone: 2021 saw the highest-ever proportion of S&P 500 shareholders voting against CEO compensation proposals, plus the lowest average support for such ballots across all these businesses. Both records look set to be broken in 2022. Nor is this shareholder unrest restricted to the US. Rio Tinto and Morrisons have seen similar votes against executive pay proposals. What do these votes mean and how should companies respond?  

Keep an eye on the CEO’s paycheck 

Controversy over CEO pay within corporations is far from new. As long ago as 1990, Harvard Business Review spoke of the long-established springtime ritual of the business press trumpeting high CEO pay figures, with politicians, union leaders and consumer activists denouncing those same numbers. 

In an effort to rein in excess, governments – beginning with the UK in 2003, and soon followed by the Netherlands and Australia – introduced so-called say-on-pay voting rules. These require that shareholders have the chance to register their support – or lack thereof – for board proposals for CEO compensation. The practice gained a higher global profile when the US’s Dodd-Frank Act led to US-listed companies being required to hold such votes at least once every three years. Several other developed countries, including France and Germany, have adopted versions of say-on-pay. 

The high-profile rejections of CEO compensations proposals above were all outcomes of say-on-pay votes. How concerned should companies be about shareholder action? 

Very few barbarians are at the gate 

CEOs do not need to worry about what might seem like the most obvious issues. To begin with, in many countries, including the US, these votes are non-binding and advisory. Boards can, perfectly legally, simply ignore them. In the UK, certain votes are binding but not all – including the ones mentioned above. 

And these negative votes are not currently very common. In the wider US corporate universe, the proportion of rejections (between 2% and 3%) and percentage of supportive voters (roughly 90%) have stayed reasonably constant for the past decade. The record-breaking 2021 S&P 500 figures for rejections also need to be seen in context: the total negative say-on-pay votes for companies that year was just 20, or 4%. And the average number of shareholders supporting pay proposals, while down from 92% in 2014, was still at 88% in 2021. In other words, while headline writers may focus on the increase in high-profile rejections at big companies, these cases are newsworthy because they remain rare. 

The strongest sign that companies pay limited attention to say-on-pay voting is that CEO salaries continue to rise rapidly. In the US, for example, between 2000 and 2010 (prior to Dodd-Frank), median CEO pay at large corporations grew at an annual rate of around 0.5%. For 2010 to 2016, however, the equivalent number is 3.4%. As a tool for limiting CEO compensation, say-on-pay is looking quite blunt. 


So why should boards worry about CEO compensation? 

To understand why an increase in voting against CEO pay should nevertheless concern companies, we need to look at what is angering a small, but growing, number of shareholders.  

Negative votes on pay are, naturally enough, a sign of shareholder discontent. For example, it is no surprise that, independent of other factors, poor economic performance in the preceding year is associated with a higher probability that shareholders will reject CEO compensation deals. Scandals do not help. The Rio Tinto vote, for instance, was against proposed compensation for a retiring CEO, Jean-Sébastien Jacques, who left amid public outcry against the company’s destruction of 46,000-year-old sacred rock shelters in Australia.

The nature of pay proposals can also have an effect. In business, greed is no longer good. In each of 2020, 2021 and 2022, analysis of negative say-on-pay votes indicates that a major contributing factor in each year was “problematic pay practices.” This is a term used by Institutional Shareholder Services, a proxy advisory firm, to cover excessive or egregious compensation provisions in contracts. The other two leading contributors to pay-package rejections were a lack of clear links between pay and performance, and extremely high compensation levels that don’t seem justifiable to shareholders. 

A merely risk-averse board may see this as a reason to avoid high pay increases in poor economic times. But a forward-looking one will recognize it as an early warning of the deepening business and societal concerns surrounding fairness in executive compensation.

Giving the leaders their due: achieving balance between executive pay and corporate governance
Economic inequality is a massive issue in many countries, as the average CEO-employee pay ratio is now 670:1 for the largest 300 US companies.

Reputations are on the line 

In particular, boards need to be aware that a high ratio of CEO compensation to average compensation creates both governance and reputational challenges. While high CEO pay may attract talent to the top job, it can cause discontent lower down in the company. For example, a recent study shows that a wider CEO-employee wage gap leads to lower levels of research and development (R&D) productivity, apparently stemming from lower employee motivation.  

More alarmingly, other research shows a strong link in the banking industry between a wide CEO-employee pay gap and the frequency of wrongdoing by employees:, a problem exacerbated by the common practice of including stock options in CEO pay packages. Whether elevated CEO-employee ratios lead directly to such problems or are a sign of other governance issues, boards need to be aware of the danger. 

High CEO pay may also give rise to reputational risks. Surveys have repeatedly shown that the wider society is uncomfortable with high CEO-employee pay ratios but may fail to take any meaningful action as consumers, simply because they are not aware of the size of the disparity. A Swiss study found that, after they were informed of these ratios at competing companies, consumers were more likely to buy from the brand with the smaller gap.  

Moreover, a 2016 paper found that disclosure of a high CEO-employee pay ratio led to greater concerns about pay inequity and, indirectly, a lower willingness to invest. Reputational challenges arising from high CEO-employee pay differences may not currently be pressing but, if stakeholders’ attention is drawn to the issue, they are likely to become more proactive in resolving it. The slow but perceptible growth in negative say-on-pay votes will then appear to have been as early sign of the trend. 

How should boards react? 

Companies offer high CEO compensation to recruit, incentivize and retrain the best people to lead them. These drivers of pay levels will not disappear. Boards, however, need to rethink the significance and structuring of CEO pay in the wider context of business activity and social context.  

This begins at the perception level. Currently, most boards are not taking say-on-pay votes very seriously because, as noted earlier, the vast majority are approved, and rejections are largely non-binding. In practice, the fallout from a negative vote may be limited to a difficult day or two for the communications department. But as shareholders become more deeply conscious of pay inequity in their businesses, they will become increasingly dissatisfied with the existing approval mechanism and will eventually call for change. 

Next, senior executives must reconsider their executive pay structures. It is no longer a sign of commercial status to pay excessive salaries to leaders. Forward-thinking, socially conscious boards will seek a balance between recruiting the best executives and meeting the demands of good corporate governance. When a business says it will pay whatever it takes to secure a particular CEO candidate, it is now seen as a concession to an outdated culture of elitism that is detrimental both to the company’s reputation and to society as a whole.  

Boards need to learn to say no to excessive pay packages before shareholders reject them. They should also consider inserting a “clawback” clause into CEO contracts that allows the business to reclaim a portion of a CEO’s compensation in the event of marked underperformance. Any candidate unwilling to accept such limitations may not be the best leader for the company. 

As part of these changes, boards need to understand the context of high CEO compensation for their own businesses. A 2021 study found that, where average pay was high by market standards within a firm, high CEO-employee wage ratios did not harm productivity. For companies where average pay was low, they did. This suggests that competitively high CEO compensation is acceptable as a policy provided it is accompanied by a policy of competitively high compensation across the workforce. 

Finally, boards need to appreciate the social significance of CEO pay. Economic inequality is a massive issue in many countries. With the average CEO-employee pay ratio now 670:1 for the largest 300 US companies,14 CEO compensation levels are becoming a lightning rod for negative publicity. Companies need to calibrate their CEO compensation in line with that for all other employees, with transparent links to performance. Following this route, the CEO can be less of a scapegoat for shareholder frustration and more of a role model for an equitable and meritocratic society.


Stephen Smulowitz

Stephen Smulowitz

Term Research Professor at the IMD Global Board Center

Stephen (Steve) Smulowitz is a Term Research Professor at the IMD Global Board Center. His major research interests are in corporate governance and pay incentives. Additionally, his research examines the relations between and among community embeddedness, diversity, and firm performance.


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