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As Wall Street Has Made Gains, So Have CEO Salaries

The average pay for a chief executive rose 6.8 percent last year to a total of $11.5 million, on track to set a post-recession record.
Four thousand U.S. dollars are counted out by a banker counting currency at a bank in Westminster
U.S. dollars are counted out by a banker. REUTERS/Rick Wilking

A go-go stock market delivers dividends to shareholders, but the real beneficiaries are corporate chieftains.

After taking a breather in 2015, CEO pay packages bounced back in 2016, according to an analysis by the Wall Street Journal. Buoyed by a rising equities market, increased profitability and investor-pleasing stock buybacks, median pay for big-company CEOs rose nearly 7 percent last year, to $11.5 million.

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“CEO pay today is very tied to the market,” John Challenger, CEO of executive outplacement firm Challenger, Gray & Christmas. “It is the number one measure of CEO performance, and so in a year where the markets have gone up so quickly, inevitably CEO pay is going to follow,” he told NBC News.

As Markets Rise, So Do Salaries

“Right now, I think the increase in CEO pay is more stock market driven than profit driven,” said Radhakrishnan Gopalan, an associate professor in the Olin School of Business at Washington University. “The stock market is rising in anticipation of future growth in profits,” he said. “The stock awards, which are basically what’s driving the growth in CEO pay, are mostly a motivator for future performance.”

This kind of forward-looking optimism is typical of a stock-heavy incentive structure, but some warn this can be an imperfect way of measuring performance, since bull market gains aren’t matched proportionately with bear market losses.

Unfortunately, they never retrench,” Gopalan said. “That link is weaker on the down side.”

A company’s prospects in January might not be borne out by market conditions when profits and losses are tallied up at the end of the year. “The compensation tables that come out in yearly proxies don’t really tell us what CEOs are making,” said John Roe, managing director and head of ISS Analytics. “You have to project into the future to see how these programs turn out,” so a board with an overly rosy outlook might overestimate the year’s performance when doling out equity-based compensation.

Win-Win, Even if You Don't Win

Another reason CEOs can be handsomely rewarded even when performance doesn’t seem to warrant it is because they’re essentially graded on a curve, where doing less poorly than peers or competitors in a bad year counts as a win.

Charles Elson, professor of corporate governance at the University of Delaware, told NBC News that when compensation becomes an arms race, it can create a dynamic that skews CEO pay too high.

“Pay needs to be done based on internal metrics,” he said. “That’s been the issue for a while.” Instead, Elson said companies tend to look around at what other companies pay their chief executives. “Obviously, that’s decoupled from performance.”

“There continues to be a perception in the boardroom that CEO talent is scarce and that the board has to do everything it can to defend that talent pool,” Roe said.

Is a Good CEO That Hard to Find?

In reality, CEO job-hopping is far from the epidemic boards seem to think it is, Challenger said.

He compared corporate boards to sports franchises bidding for top athletes. “They want the ones who have been successful most recently… I think that’s what creates the pressure.” Even as they woo executives with big stock packages, board enthusiasm is capricious, Challenger said. “You have a couple of bad quarters of underperforming to expectations, and their days are numbered,” he said. “They know the tenure is going to be short.”

Brian Kropp, HR practice leader at CEB, said the best CEO pay strategies have less to do with the form or even the amount of compensation, and more to do with transparency.

“The best thing we’ve seen in terms of using a CEO pay strategy is to make it as transparent as possible,” he said. “When it doesn’t seem fair — that’s what’s demotivating to the rest of the workforce.”