Analysing the Remuneration of Top CEOs

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The best performing CEOs over five or more years have lower remuneration packages than other CEOs, offset by much larger accumulated shareholdings.

Egan Associates recently conducted our annual “CEOs who deliver” analysis for the Australian Financial Review’s BOSS Magazine. The feature aims to identify which long serving CEOs have achieved the best results.

The top 200 Companies ranked by Market Capitalisation at 31 March 2016 were assessed on Total Shareholder Return, Return on Equity and Revenue growth over a five-year period. Total shareholder return received twice the weight of the other metrics. A number of companies were excluded as they had not been listed for long enough to assess total shareholder return. Just under 170 companies remained.

Once companies had been ranked, CEOs were removed who had not held the CEO or equivalent leadership role at their company for at least five years, leaving approximately 80 CEOs. Of those, the Top 10 CEOs for the 2016 analysis were as follows:

Top10

Many would believe that these CEOs should outearn their peers. However, when Egan Associates analysed 2015 remuneration data for the tenured CEOs, the results did not support this hypothesis. Indeed, the reverse appears to be true, as shown by the following table and figure.

Top 10 CEO Remuneration

The calculation of LTI in this case is not the latest grant as we often use in our analyses, but the carried interest, which considers the annualised current value of unvested LTI equity grants over the last three years.

Top Ten remuneration mix

As can be seen, the top 10 CEOs generally earned less than their peers (interquartile ranges). Yet ten is a relatively small sample and there are number of founders within the list. Dividing the CEOs who had served at least five years into two groups produced a slightly different result.

Top 40 Remuneration

The least well performing CEOs received better fixed remuneration, approximately equal STI and lower long term incentives, clearly illustrated by the following figure.

Remuneration Mix Top 40

Another key motivator for executives is skin in the game. Examining the CEOs’ shareholdings (both directly and by a related party), there is a significant difference between the value of shareholdings of top performing companies and the rest.

Shareholdings for top companies

Considering this, one could conclude that “skin in the game” is the best motivator or primary source of commitment. Boards hoping to align executive remuneration with shareholder interests may consider raising executive mandatory shareholder requirements.

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