In 2023, the average pay for CEOs of the largest publicly held companies in the Charlotte region fell 14%, in line with a national pattern. Bank of America’s Brian Moynihan received the most among Charlotte CEOs, earning $28.6 million, down from $30 million last year. Other top earners are Nucor’s Leon Topalian at $22.5 million and Duke Energy’s Lynn Good at $20.6 million.

Nationally, highest-paid CEO compensation dropped 19.4% from 2022 to 2023. This is significant because it’s unusual for CEO compensation to drop when the stock market does well.

There are a number of reasons why CEO compensation is trending downward:

Financial Performance Metrics

Economic recessions tend to result in a reduction in the financial performance of a company, which is an important factor in determining CEO compensation. Most executive compensation plans are linked to important performance measures (KPIs) like revenue, profit margins, and share prices. In economic recessions, these tend to decline, resulting in lower bonuses and performance-based incentives for CEOs.

Shareholder Pressure

At times of economic hardship, shareholders take more notice of corporate performance and CEO compensation. Shareholders will request cuts to CEO compensation in an effort to reflect the struggles of the company’s finances. Pressure can take the form of shareholder votes during annual general meetings, public remarks, or face-to-face negotiation with the board of directors.

Regulatory and Public Scrutiny

During economic downturns, executive compensation typically receives more regulatory and public attention. There is more sensitivity towards income disparity and the perception of excessive CEO pay while most others struggle financially. There are regulations put in place or enforced with greater restrictions on executive compensation by the regulatory bodies, and the sentiment of the general public makes it more difficult for companies to get away with generous pay schemes.

Internal Company Policies

Firms can adjust their in-house compensation policies when the economy is down. This can be through freezing or cutting salaries, changing bonus plans, or delaying pay. Boards of directors, directed by compensation committees, can choose to make these adjustments in order to save cash flow and ensure financial stability.

Market Comparisons

Economic downturns impact not only individual firms but the entire industry. Consequently, firms tend to compare the CEO compensation with industry peers. If the industry practices move towards lower compensation because of the state of the economy, firms tend to modify the CEO remuneration to keep themselves competitive and in accordance with market conventions.

Long-term Incentive Plans

Long-term incentive schemes (LTIPs) are an important part of CEO remuneration and are frequently linked to multi-year performance targets. In periods of economic decline, the prospects of achieving these targets reduce, leading to lower LTIP payouts. Firms can also restructure the conditions of these plans to suit the new economic landscape, either by modifying performance targets or altering the nature of the incentives.

Cost-cutting Measures

Economic downturns necessitate cost-cutting measures across the organization, including executive compensation. Companies may implement broad-based salary reductions, furloughs, or layoffs, and CEOs are often expected to lead by example. Voluntary pay cuts by CEOs can be a symbolic gesture to demonstrate solidarity with employees and shareholders, as well as a practical measure to reduce expenses.

In short, the recent drop in Carolinas’ CEO pay is a result of a combination of economic stress, heightened accountability, and changing corporate governance norms. As firms navigate all of that, connecting executive compensation with performance and stakeholder expectations is a key factor to consider.