US executive pay rises at fastest rate in 14 years

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US bosses’ pay is increasing at the fastest rate for at least 14 years, according to new figures which critics say illustrate how ballooning reward packages such as Elon Musk’s risk exacerbating social inequality.

So far in 2024, median chief executive pay at S&P 500 companies has risen by 12 per cent, according to ISS Corporate, part of proxy adviser Institutional Shareholder Services. That compares with a 4.1 per cent year-on-year increase in US wage growth, according to official figures.

Musk this week secured an emphatic victory in a shareholder vote on his $56bn package of stock options — the largest in US history.

Musk’s win — the vote ratified a pay package first made in 2018 — sends executives a message that “the sky’s the limit here . . . you can earn as much as you want to”, according to William George, a former compensation committee chair on Exxon’s board and former chief executive of Medtronic.

Executive pay “has gotten out of control”, George said. “This is going to cause a further split in our country between the haves and the have nots. This is a grave concern to me because I think there will be a loss of trust [in companies].”

Robin Ferracone, chief executive of Farient advisers, a pay consultancy, said burgeoning executive pay awards were largely being driven by “companies wanting to keep their CEOs from taking phone calls from [rivals’] search committees”.

Musk’s pay package is unusual for a chief executive as it comprises stock options that are tied to very ambitious goals, including on market capitalisation and revenue. Few other executives would risk all their pay on so-called “moonshot” awards, she said.

Peloton, Nikola, LendingTree and Paycom Software are among a handful of companies that have offered their chief executives mega stock grants only to see their share prices sink.

George said he was “disappointed” by major investors, such as BlackRock and Vanguard, which “don’t step up” against excessive executive pay awards.

BlackRock and Vanguard, Tesla’s largest institutional investors and the largest asset managers in the world, both voted for Musk’s $56bn pay package on Thursday. The duo have for years overwhelmingly approved executive bonuses. In 2023, Vanguard supported 96 per cent of pay votes at all companies, according to Diligent. BlackRock supported 91 per cent of these pay votes.  

Both BlackRock and Vanguard typically support at least 90 per cent of pay packages at US companies each year, Diligent data shows. Only 1 per cent of S&P 500 pay votes have failed so far this year, according to law firm Sullivan & Cromwell.

Representatives for BlackRock and Vanguard responded to requests for comment by referring to their pay voting policies, which aim to align pay with performance.

“There is a contagion effect with respect to executive pay. One big pay package seems to generate another,” said Jill Fisch, a professor at the University of Pennsylvania’s law school. But following the Musk vote, “I don’t think there is a big contagion effect here,” she said.

“The shareholder vote inevitably is going to send a mixed message,” in part because it is looking backward at pay awarded in 2018 and that Musk is a chief executive who “is in a class by himself”.

“It would be really hard to look at whatever the vote is and say I know what that is going to mean for some other executive.”