CEO pay hikes not likely to hold up in 2020

CEO pay rose at most U.S. money managers and banks with asset management units, mirroring strong markets and increased asset levels at firms in 2019, an annual analysis of proxy filings by Pensions & Investments found.

Looking forward, however, pay is expected to drop to a level that is yet unclear but dependent in part on the outcome of U.S. elections, the pandemic’s impact on markets and company profitability, sources said.

An analysis of CEO pay at 11 firms showed that compensation increased at eight asset managers and banks. In 2018, CEO pay was a mixed bag, with compensation increasing at six firms and decreasing at five over the prior year.

Alan Johnson, managing director of New York-based compensation consultant Johnson Associates Inc., said increased CEO pay was “pretty rational” given the performance of firms last year. 

Year-end pay for 2020, however, is “likely to be down significantly,” with senior executives apt to see pay decreases “at least as bad as everybody else,” Mr. Johnson said.

Only two firms P&I tracked failed to see stock price returns in the double digits (ranging from 15% to 47.3%) in 2019. Bank of New York Mellon Corp., New York, had a 9.5% stock return, and Franklin Resources Inc., San Mateo, Calif., saw a -9.3% return for 2019.

But so far in 2020, all firms reported negative stock price returns, most in the double digits, through May 14. Atlanta-based Invesco Ltd. saw the sharpest decline, with a -60.3% return for the period, followed by San Francisco-based Wells Fargo & Co., whose stock price returned -53.9%.

How hard CEO compensation will be hit is uncertain, however, as it will partially depend on an economic recovery in the wake of the coronavirus pandemic, he said. 

2020 year-end bonuses for other investment professionals at traditional asset managers are expected to drop 20% to 25% from last year, according to projections in a May 13 Johnson Associates compensation report.

The highest paid CEO last year was Charles W. Scharf, who in October became chief executive officer and president of Wells Fargo and pulled in $34.3 million, representing an 86.1% increase in pay for the position over 2018, according to proxy filings. Mr. Scharf was followed closely by James P. Gorman, CEO of Morgan Stanley, New York, who received $31.6 million, marking a 12.3% pay increase. J.P. Morgan Chase & Co. CEO Jaime Dimon also received $31.6 million, up 5.3% over 2018. 

The gap between CEO compensation and that of the median employee was also the widest at these three firms.

The CEO pay ratio at Wells Fargo was 550:1, while Morgan Stanley’s was 248:1 and J.P. Morgan’s 393:1, proxy filings show.

At Wells Fargo, a one-time “replacement award” valued at $28.8 million related to his hiring contributed to the gap, the company’s proxy statement said. 

Mr. Scharf was previously CEO of BNY Mellon, where he received $9.4 million in total compensation for 2018.

In its proxy filing, Wells Fargo also calculated an “alternative” CEO pay ratio of 349:1, which excluded the replacement award and included Mr. Scharf’s annual equity award of $15.5 million received in March. 

Since last year, only three firms — New York-based BlackRock Inc., Boston-based State Street Corp. and Invesco — reported a decrease in compensation for the CEO under SEC disclosure rules.

BlackRock CEO Laurence D. Fink received $24.3 million, down 8.4% from the prior year, while Invesco CEO Martin L. Flanagan received $11.5 million, down 10.9%. Ronald P. O’Hanley, CEO of State Street, received the lowest compensation among chief executives in the group at $8.7 million, a 46% decline in pay. 

Mr. O’Hanley, who was previously president and chief operating officer and made $8.3 million in that role in 2018, became CEO of State Street in January 2019. In 2018, then-CEO Joseph L. Hooley received $16.1 million in total compensation.

P&I examined compensation reported pursuant to SEC rules, which includes changes in pension value and non-qualified deferred compensation. Data reported to the SEC also include equity-based awards granted during 2019, but not awards granted this year for 2019 performance.

The fact that 2020 is also a presidential election year could have an impact on year-end pay for chief executives, or at minimum scrutiny surrounding these disclosures, Mr. Johnson said. 

“If the Democrats win the White House and take the Senate, then I think financial services pay will be a big deal,” resulting in hearings that will address CEO pay, he added.

One point to note regarding the compensation of top executives in asset management is that it “tends to be very lumpy and is tightly tied to the equity value and profitability of the firm,” said George R. Wilbanks, managing partner of Wilbanks Partners LLC in Stamford, Conn.

As such, “historically, you will see individuals’ compensation go up and down steeply,” he said.

Laura K. Pollock, founding partner at Third Street Partners LLC, New York, an executive search firm and strategic adviser for asset managers, said if it comes down to it, senior money management executives “should be taking a (pay) hit on behalf of the organization to ensure stability” of the firm.

“In some cases, the CEO should be taking home nothing. It’s happening in other industries, so why shouldn’t it be happening in asset management? If your organization is suffering, should you be taking home money?” Ms. Pollock said.

For example, amid the economic downturn caused by the coronavirus, Walt Disney Co. Chairman Robert Iger is one of several executives who will forgo his salary, while Disney CEO Bob Chapek will have his salary cut in half, Bloomberg reported on March 30. 

Moves such as this may conflict with the status quo in the asset management industry, however, to project stability in turbulent times to investor clients. According to Mr. Johnson, the message for many money managers to their customers and employees is, “We are here. We are strong.”

At airline, retail and cruise ship companies directly affected by stay-at-home orders, CEO pay has been cut or trimmed as a “show of solidarity” with the thousands, and in some cases tens of thousands, of workers who lost jobs or were furloughed, he said.

But asset managers are consciously trying to send another message. “The message has been very different. It’s about stability and continuity,” Mr. Johnson said.