Business Day

The Trump Effect on C.E.O. Pay

Fair Game

By GRETCHEN MORGENSON    MAY 26, 2017

After the November election, the stock market experienced a Trump bump. The surge in share prices thrilled investors, but some corporate executives had even more reason to celebrate. That’s because rising prices can fuel higher pay even if other corporate results are so-so, which seems to be the case for some companies right now.

Consider Equilar’s rankings of the top 200 highest-paid C.E.O.s, compiled for The New York Times. The company in the middle of the list awarded its C.E.O. $16.9 million, 9 percent more than it did in 2015, even though median revenues increased only 3 percent.

Total shareholder returns were explosive — up 14 percent for the median company. A close look at the numbers suggests that the levitating 2016 stock market was a powerful driver of C.E.O. pay last year, and the bull market seems to have made shareholders less likely to complain about the pay increases executives received. Yet there are serious questions concerning the ties between executive pay and a company’s stock performance.

Corporate compensation committees typically consider stock performance when determining pay. Another study by Equilar, a compensation analysis company in Redwood City, Calif., found that 57.4 percent of all Standard & Poor’s 500-stock index companies used total shareholder return, which includes dividends, as a performance measure for compensation purposes in 2015.

But calibrating how much weight a stock price should have on C.E.O. pay is tricky: A company’s stock price can be influenced by share buybacks and other financial engineering that does little to produce long-term value. Why reward a C.E.O. for that?

And sometimes a company’s stock price rises for reasons that are unrelated to its operating performance. Remember when oil prices were hitting the stratosphere a decade ago? Executives at companies like Exxon Mobil reaped enormous pay awards not just because of able leadership but also because the escalating value of the commodity propelled the prices of their stocks.

Something similar may have happened after last year’s presidential election. Call it the Trump effect on C.E.O. pay.

By early November, many stocks were barely up on the year — the S.&P. 500 had eked out a mere 2 percent gain. But after the election, the overall market rallied on expectations of the incoming Trump administration’s pro-business agenda. The S.&P. 500 wound up almost 10 percent higher for 2016.

For an outsider, determining precisely how a company assesses a performance metric is difficult, of course. But the lift from the Trump effect seems to have been most pronounced among industries in which investors believed the administration’s deregulatory fervor would be greatest and thus lead to lower costs and more profits.

The financial arena is a prime example. Throughout most of 2016, the S.&P. Financial Select Sector Index bounced around a narrow range, essentially trading flat on the year. But it took off after the election, soaring to a 20 percent gain by year’s end. Investor assumptions that the new administration would roll back the Dodd-Frank Act and generally reduce restrictions on financial activities powered this move.

There are 31 finance executives on Equilar’s highest-paid C.E.O. list for 2016. Over half of them — 17 — got raises last year, and each of the 17 companies used shareholder returns as a metric in determining their pay. Ten of those C.E.O.s received double-digit increases.

The highest-paid finance executive was Jamie Dimon, the chief executive of JPMorgan Chase. His total compensation was $27.2 million, nearly a 50 percent increase from the $18.2 million he received in 2015, according to Equilar.

In the top 200 rankings, Equilar relied on standard compensation figures required in proxies by the Securities and Exchange Commission. JPMorgan supplied those figures, but in another section of its proxy, it listed Mr. Dimon’s pay as $28 million in 2016 and $27 million in 2015, so according to the financial firm, Mr. Dimon’s pay increased by just $1 million, or nearly 4 percent.

In detailing Mr. Dimon’s pay, the proxy noted that the bank gained market share in most of its businesses and generated record net income and earnings per share. The fact that JPMorgan’s total shareholder return was 35 percent for the year isn’t lost on investors.

Shareholders seem relatively content with Mr. Dimon’s package. At the bank’s annual meeting in mid-May, 92 percent of votes cast approved its pay practices, the same percentage as last year.

Investors in most other financial companies did well — only five showed a decline in total shareholder returns for 2016.

However, while 12 of the finance companies’ shares outperformed the sector stock index, 19 did not. In spite of this underperformance, 10 of the 19 companies awarded their C.E.O.s higher pay, and some of the increases were significant.

It looks like a very sweet game: Heads I win, tails you lose.

One fortunate chief executive was Arthur M. Coppola, a co-founder of the Macerich Company, a real estate investment trust in Santa Monica, Calif. Although revenues at the company fell 19 percent in 2016 and its shares lost 9 percent, Mr. Coppola received $13.5 million, a 2.6 percent increase over last year.

Thomas O’Hern, Macerich’s chief financial officer, said the bulk of Mr. Coppola’s pay consisted of stock grants with three-year earn-out periods based on the company’s performance against all public real estate investment trusts. “It’s very unlikely he would end up earning that amount based on where we are today,” Mr. O’Hern said.

Shareholders are scheduled to vote on Macerich’s pay practices on Thursday.

Daniel H. Schulman at PayPal Holdings is another case in point. He received a compensation package valued at $19 million, a 31 percent increase over 2015. That pay raise far exceeded growth rates in the company’s sales, which were up 17 percent, and earnings and shareholder returns, which both rose around 9 percent during the year.

Amanda Coffee, a PayPal spokeswoman, said in a statement, “The majority of Dan Schulman’s compensation is driven by performance; 2016 was an extraordinary year for PayPal as we delivered results that exceeded our targets and delivered double-digit growth across all key metrics.”

At the company’s annual meeting on Wednesday, 95 percent of the votes cast favored PayPal’s compensation practices.

To be sure, the Trump bump didn’t push every company’s shares higher in 2016. As the pay rankings show, though, even a falling tide lifts the boats of some C.E.O.s.

A total of 44 companies on the list had the same C.E.O. in place in 2015 and 2016 and also had declining shareholder returns. Yet at 23 of these companies, chief executives received raises in 2016.

Among the bigger winners in this group was Steve Ells, the chief executive of Chipotle Mexican Grill. Even as his company’s revenues fell 13 percent and its shares declined by 21 percent, Mr. Ells snared a 13 percent increase in pay, receiving $15.7 million in 2016.

Chris Arnold, a Chipotle spokesman, said most of Mr. Ells’s raise last year came in the form of stock grants. “The 2016 award will not vest and therefore will be completely without any realizable value,” he said, “unless our stock price reaches an average of $700 per share for a period of at least 60 consecutive trading days before February 2019.”

Mr. Arnold added that a 2013 grant, originally worth $8 million, had no value when it expired in 2016.

Mr. Ells’s compensation has come under fire from shareholders before; at last year’s annual meeting, 28.2 percent of the votes cast opposed Chipotle’s pay practices. However, during this year’s annual meeting, held on Thursday, votes against the practices totaled only 6 percent.

Then there’s Kimberly-Clark’s C.E.O., Thomas J. Falk. He, too, received a 13 percent increase in pay, even as sales at his consumer products company fell 2 percent and its stock lost 7.5 percent.

A Kimberly-Clark official said that its board believes the most accurate way to measure longer-term performance is to use multiyear total shareholder returns. “The company’s three-year return is 24.9 percent and its five-year return is 90.3 percent,” the official said in a statement, “which demonstrates the value that Kimberly-Clark has delivered to shareholders under C.E.O. Tom Falk’s leadership.”

Sure enough, Kimberly-Clark’s shareholders seem content with Mr. Falk’s pay. At the company’s annual meeting in April, only 3.3 percent of the votes cast opposed its pay practices.

It’s hard for investors to think analytically when the market has been rising. That’s precisely why skepticism about soaring pay is important right now.

A version of this article appears in print on May 28, 2017, on Page BU1 of the New York edition with the headline: The Trump Effect on C.E.O. Pay.

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