Do Companies with Higher Profit Margins pay their CEOs More-Chapter 14 Summary

Chapter Summary
It is well known that larger companies, in terms of revenues and market capitalization, provide higher CEO pay opportunity than smaller companies. We set out to understand if higher profit margins (EBITDA/revenues) also are related to higher pay. We found that industries with higher margins provide higher pay opportunity than lower margin industries, although size is more highly correlated with CEO pay opportunity.

Key Points
1. Industry Matters – Higher margin industries (energy, information technology, health care) provide higher pay opportunity than low margin industries (industrials, materials, consumer discretionary). Depending on the size of the company, the differential in CEO pay opportunity is from 21% to 46% higher at high margin companies.
2. Margin Varies Much More than Pay Opportunity – CEOs of large companies receive a “minimum” level of pay opportunity for the substantial accountabilities of the position. Thus, margin differentials tend to be much greater than pay differentials, as is the case for revenue differentials. The margin differential between high and low margin companies is large – between 171% and 47%, respectively, for the large and small company samples. This is compared to 46% and 21% pay differentials for these same samples.

3. Realizable Pay is Negatively Correlated with Margin – Lower margin companies tend to have higher realizable pay than higher margin companies. Because realizable pay is largely a function of TSR, higher margin companies, with higher market expectations, may require a greater level of performance – outperformance – to achieve the same levels of returns as lower margin companies.
4. Margin Matters – Industry and margin analyses are relevant to pay competitiveness assessments. These analyses are even more vital when a company is one of the largest or smallest in its industry and/or comparables are limited.

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