The CEO Value Index - in response to the recent FT article on CEO pay

This is Simon Patterson, Managing Director  of Remuneration Associates – the London based consultancy advising companies around the world on executive pay and performance…
….this is one of an occasional series of talks we give on subjects that we think you will find of interest. Today, I wanted to explain how we unpack the numbers for our unique CEO Value Index, and how that comes in useful.

To start off with, before we do that, let’s provide a bit of context. It is, say, exactly last week and the Financial Times has published an article by an experienced journalist entitled “Eye-popping executive pay rewards [are] luck, not managerial wizardry”

So…several pointers there to the fact that this is an article about someone getting paid too much and not deserving it.

The key points from the article are that the CEOs of Big Oil (they are all lumped together, here, for simplicity I would imagine) are just plain lucky to be where they are when oil prices are hiked by war, inflation causes ‘random distortions’ and [getting slightly more complex here] performance measures may not be adjusted for the impact of inflation on replacement costs.

At the same time, you will recall the ‘eye-popping’ reference in the title and that - of course – is the amount CEOs are paid. The article refers to increases at Exxon, Shell and BP as examples.

There’s no doubt the CEO of a global Oil & Gas company does not pass the ‘nurse test’.

That is to say: if one were to open up the paper and on one side you had a picture of the CEO and on the other all the nurses one could hire with that CEOs pay, and asked the public to choose which they’d prefer to keep… guess who would win, the CEO or the nurses?

Quite.

But this is not a popularity contest. While experienced heads from the industry would agree that the amounts paid seem very high [$36m in 2022 was the figure published for Exxon’s CEO Darren Woods], creating value isn’t easy.

If only we had a simple ‘rule-of-thumb’ guide to help us understand what is going on, here.

Well, of course, we do. It’s called the CEO Value Index.

The CEO Value Index tracks the value delivered to all of a company’s shareholders for every pound paid to the CEO. A typical FTSE100 CEO barely reaches £500 paid to all of their shareholders, the top ten Index performers in the FTSE100 range from £550 to £4250 [last year].

By comparison, Exxon’s CEO Value Index in 2022 was £5,271

In other words, he may be paid a lot, but he is worth it as far as Exxon investors are concerned.

That analysis can be conducted for any firm, anywhere in the world, at any time – they can all be compared with our database, which has been accumulating data since 2012.

• We look at Value Added to shareholders by the company over a four year period and include changes in market capitalisation, dividend payments and share buybacks
• We then look at Total Remuneration paid to the CEO over the same time frame – we look at all salary paid, all bonus actually paid, and the realized value of long-term incentives during that period

The consistency of this finding is remarkable - the range of CEO Value Index outcomes has remained within a very consistent range for over ten years and so when we say an Index is top decile or better, we can back that up.

In the case of Exxon, this is how we reach that simple figure of £5,271

Bear in mind, also, that we are looking at the same inflationary impact on both sets of figures. We are also looking at actual value creation delivered to all the shareholders, not a performance metric which some may argue can be manipulated.

So…

For Shareholders:

Clear and immediate evidence of whether their executives are delivering value, relative to the total pay opportunity being offered

The Index provides a simple comparison across sectors, by company size, and over time

For Remuneration Committees and Reward professionals

The ability to review the results of incentive compensation design. How well did pay align with performance? How does our pay to performance alignment compare with other relevant comparators?

The ability to calibrate future performance requirements, given ‘benchmark’ pay

For Regulators and Commentators

A comprehensive view of pay and performance across the UK, over time and across sectors

A snapshot of pay-to-performance alignment, providing an objective ‘commentary’ on recent regulatory changes

Of course… None of this makes nurses less popular, or CEOs more popular!