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  • Writer's picturePOE Group

A Case Study of the Disconnect Between CEO Pay and Company Performance

Updated: Jul 27, 2022

2020 was a challenging year for many companies as the pandemic resulted in widespread issues related to shutdowns, reduced demand for certain goods and services, and logistics headaches.

While there were some industries that had banner years in 2020, a significant portion of companies ended the year with a reduction in revenue and earnings compared to 2019. Given the circumstances, it would be expected that executive pay would be lower than usual, but the exact opposite is proving to be true as annual proxy statements are being filed for the 2020 calendar year.

The Wall Street Journal conducted an analysis of CEO pay for 322 companies in the S&P 500. It found that pay increased for 206 of the 322 CEOs included in the review, and the median pay increase was almost 15%. A handful of these cases can be explained by companies that had great business results in 2020, but certainly not all.

Base salaries for CEOs didn’t change significantly in 2020. In fact, some companies announced that their CEOs were giving up some or all of their salary for the year during the height of the pandemic. The impact of changes to base pay for CEOs is often minimal, as most of their compensation is in the form of bonuses and equity grants. Therefore, most of the increases in CEO pay seen during the year can be attributed to higher bonuses, or larger stock grants.

A Pandemic Pay Case Study: Foot Locker

There are a number of companies that reported lower revenue and earnings for 2020, and higher CEO pay, when compared to the previous year. These situations warrant additional scrutiny by shareholders and proxy advisors. We will take a look at one such example – Foot Locker, Inc. (NYSE ticker: FL).

Foot Locker is a retailer of shoes and apparel. Perhaps not surprisingly, Foot Locker saw decreases in both revenue (-5.7%) and net income (-34.2%) compared to the prior fiscal year.

What would surprise many investors is that despite the decreased financial performance for the year, Foot Locker’s CEO, Richard Johnson, had significantly higher total compensation — almost 30% higher than the prior year.

Most of the change was due to his bonus for the fiscal year being 179% of the prior year’s amount. Given that Foot Locker announced that it was furloughing most of its employees without pay in April 2020, this bonus payment could be hard to explain to its workforce.

Board of Director Actions

So how did Foot Locker’s board of directors arrive at a bonus payment for the CEO that far exceeded the prior year? The answer lies in their annual proxy statement, which explains that the company’s sales is the business metric that determines the majority (80% weighting) of the payout.

For the fiscal year that began February 1, 2020, Foot Locker’s board did not set sales targets until June, a delay of over four months. This sales goal setting process “occurred after the Company experienced the confluence of a 43% decline in sales during the first quarter of 2020 due to widespread store closings.”

In other words, the compensation committee elected to completely eliminate the consideration of a poor first quarter when goals were created. While this may have been reasonable given that the first quarter of 2020 represented uncharted territory for many businesses, the committee went further by adding $303 million to the sales figure at the end of the year in order to “provide for the adjustment of sales from stores closed in connection with the COVID-19 pandemic and the social unrest.”

Shareholder and Proxy Advisor Issues

There are many levers that a compensation committee can use to set and evaluate performance metrics for a year that contains such uncertainty as 2020; it might delay the setting of the performance metrics until conditions stabilize or adjust actual performance to account for unusual events.

Foot Locker’s compensation committee did both, leading to achievement of the sales component of the bonus plan above maximum. We would generally not recommend this; using either adjustment approach may be reasonable, but not both in the same year.

Companies that take such drastic actions when determining their incentive payouts for 2020 are likely to face pushback from investors and proxy advisors.

One way that shareholders can weigh in on executive compensation is through the say-on-pay vote, which allows them to vote on a company’s compensation practices on an advisory (i.e., non-binding) basis.

A say-on-pay vote result of under 70% would be considered very low shareholder support, and the number of companies receiving low support appears to be on the rise. Surprisingly, Foot Locker’s most recent say-on-pay vote indicated strong shareholder approval of the compensation of its named executives. We have often said that a strong stock price cures all pay issues. Foot Locker’s stock price doubled from March 2020 to March 2021.

According to an analysis of S&P 500 companies conducted by Equilar, the number of firms receiving less than 70% support on their say-on-pay votes conducted since last September was one in six, compared to one in twelve for the same companies in the previous year.

The larger percentage of companies receiving low shareholder support for their compensation packages could be due to a number of factors, but how compensation committees decide to pay out incentives for the 2020 year will prove to be important.

Companies that do not have strong shareholder support for their executive compensation programs may experience problems with the future election of directors who sit on, or chair, the compensation committee.

In addition, Towers Watson found that almost half of companies remove and replace one or more compensation committee members after receiving low shareholder support on a say-on-pay vote. For these reasons, we would advise using caution when determining incentive plan payouts, and would recommend that any payouts have at least some correlation to company performance.

Links to Additional Information:

- Joe Kager, Managing Consultant at The POE Group. Joe is a Certified Compensation Professional with over twenty-five years of experience in compensation and human resources. Call him at 813-546-8628, or email him directly at

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