Change in Pension Calculations Drives Up CEO Pay

For larger firms, an exceptional one-year increase in CEO compensation resulted from revisions to pension calculations.

S&P 500 firms last year funded an average $1.3 million to their CEO retirement benefits, compared to $467,000 in 2013—a 10.6% one-year increase, according to research released by The Conference Board.

The research found that among larger firms (with market capitalization of $5 billion or greater), these exceptional one-year rises in 2014 mostly resulted from decisions by many organizations to revise their calculations for CEO pension contributions. Key factors that prompted these changes include lower discount rates and longer life expectancy, as reflected in updated mortality tables from the Society of Actuaries.

“In total CEO compensation reported last year by companies in the index drops to 4.4% if change in pension value is excluded from the calculation,” notes James F. Reda, managing director, executive compensation at Arthur J. Gallagher & Co. and co-author of the research report. “Changes in pension value only apply to defined benefit pension plans, including supplemental executive retirement plans, which are less common in smaller companies. Thus, similar volatility in pension calculations was largely absent among Russell 3000 companies.”

The median total compensation of CEOs of U.S. public companies in the Russell 3000 index soared 11.9% in 2014 over the previous year and as much as 34.7% over 2010. For these companies, equity awards (excluding stock options) represent 34.7% of the total value of the CEO pay package, and the median grant-date value of stock awards grew about 25% in 2014 due to market increases.

The analysis also found only a small part of CEO earnings comes from base salary; performance-based components now dominate. Annual bonuses were up in 2014, with the largest five-year increase rate among smaller companies. Stock awards continue their rise as the most important component of CEO compensation, even though significant variation in use is seen across industries and size groups. Growth companies in the information technology, materials and health care sectors are the only subgroups that continue to rely extensively on stock options.

Key Findings are available for download at The complete report, “CEO and Executive Compensation Practices: 2015 Edition,” will be released this autumn. To receive a complimentary copy when it becomes available, register at