Now might not seem like a great time to make predictions about the future of executive compensation. Given the fact that so many companies and industries are still in a period of flux due to the implications of COVID-19, it could prove difficult to accurately predict how the next ten years of executive compensation trends will play out. Still, by using relevant information and historical data as reference points, it is possible to, at the very least, see how most major companies are preparing for the future. Here are five executive compensation trends to note for the 2020s:
If there’s one thing that professionals should be confident about for the next decade, it’s that executive compensation as a whole will probably rise. Since 1978 CEO compensation has grown by over 1,000%. (That’s higher than the rate of growth for the stock market.) And recent surveys suggest that across most companies and most industries, executive compensation as a whole was still rising before 2020. Unless something drastic changes between now and 2030, it’s almost guaranteed that executives will see an increase in their compensation package totals.
Combined merit-based compensation (equity and cash) can often represent arounds 60% of an executive’s total earnings.
While there isn’t a ton of reporting on the subject, there is reason to believe that a number of companies will be adjusting — at minimum — their short-term executive compensation plans for the fiscal year of 2020. What’s more, it is expected that even more companies will review their long-term payout plans over the next several months. It is entirely possible for COVID-19 to have an impact on how companies and entire industries are able to progress over the next 1-3 years, and it would be unwise to overlook this when considering executive compensation best practices.
Across the board, companies do not usually increase executive base salary very much over time. Rather, executive compensation packages now include much higher levels of merit-based bonuses and stock options. It’s not unusual for stock options to constitute roughly half of the “average” executive’s compensation plan. This makes sense for a number of reasons. As we’ve discussed in a previous post, stock options allow companies to retain capital flexibility, while also offering talented executives a meaningful opportunity to benefit from their business’s success.
As equity has become a greater aspect of executive compensation over time, so too have merit-based bonuses. Combined merit-based compensation, (equity and cash) can often represent around 60% of an executive’s total earnings. Alternatively, time-based bonuses have steadily decreased in popularity over the past decade.
In the past, performance-based executive bonuses were almost always paid out based on financial figures. In other words, executives earned higher compensation based on improving factors like company earnings, revenue, cash flow, etc. Now though, more businesses are beginning to factor in ESG metrics (Environmental, Social, & Governance) into their compensation plans. In such a setup, executives may earn bonuses by reducing company-wide emissions or by improving the health and safety standards of their workplace. Look for this trend to continue to gain in prevalence.
Executive compensation packages are essential to business continuity and long-term success. At Blue Herring, our team has years of experience developing effective executive compensation strategies and wider business strategies. We’ll help you craft a plan that will allow your company to grow in a sustainable fashion. Contact us here to learn more about our unique services or to schedule a consultation ASAP.