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.
"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.