CEO Pay and Shareholder Returns: Is the Market Priced for Perfection?

The common market narrative paints a picture of CEOs being paid exorbitantly while shareholders see little return. This view is anchored by stark statistics, most notably the average CEO-to-worker pay ratio of 285-to-1 for S&P 500 companies in 2024. The sheer scale of these numbers, like the proposed $1 trillion pay package for Elon Musk, fuels a widespread belief that executive compensation is disconnected from performance and a key driver of economic inequality.

This sentiment often stems from how the data is presented. Critics typically point to the 7% increase in average CEO total compensation to $18.9 million in 2024 alongside annual stock returns, creating a simple, headline-grabbing disconnect. Yet, this annual snapshot can obscure the longer-term performance linkage that some research suggests exists. The prevailing narrative, however, is not about nuanced academic debate-it's about the perception of a system that rewards executives handsomely regardless of the bottom line.

The expectation is that this disconnect will be corrected. There is a widespread belief that activist investors and shareholder votes will force change. The data shows shareholder activism is accelerating globally, with compensation issues becoming a primary target. Campaigns have successfully challenged pay at companies like Southwest Airlines and Illumina, arguing that rising pay amid poor stock performance signals governance failure. The market, in this view, is priced for a future where such pressure leads to significant restraints on CEO pay.

Evidence on Pay vs. Returns: The Performance Link

The market narrative often assumes a disconnect between CEO pay and shareholder outcomes. Yet, the empirical data, when examined correctly, reveals a more nuanced and performance-linked reality. The key is in the timeframe. Critics typically compare annual pay increases to annual stock returns, a method that can obscure the true relationship. The more accurate measure looks at pay over a CEO's full service period, which shows boards actively linking compensation to long-term shareholder value creation.

The numbers from 2023 illustrate this dynamic clearly. That year, the median CEO actual total direct compensation among S&P 500 companies was $16.1 million, a 14% increase from the prior year. This jump was directly driven by a 26% increase in 2023 total shareholder return (TSR). More importantly, a deeper analysis of historical trends shows a consistent pattern: in years with positive TSR, CEO pay increased by an average of 6%. Conversely, in the two years out of the previous 13 with negative TSR, pay remained relatively flat.

This reveals a critical mechanism. CEO pay is not set annually based on a single year's stock price. It is determined over a multi-year service period, allowing boards to reward sustained performance while accounting for broader market movements. As one analysis notes, boards appear to consider both shareholder and market returns, with the two often offsetting each other in pay decisions. This setup creates a stronger, more deliberate link between executive compensation and actual company performance than a simple year-over-year comparison would suggest.

The bottom line is that the market may be priced for a narrative of disconnect, but the underlying data shows a system designed to align pay with returns. The expectation gap, therefore, might not be in the pay itself, but in the speed and visibility of that alignment.

What's Already Priced In: Market Sentiment and Governance

The market's view on CEO pay risk appears to be one of complacency, and the data suggests this sentiment is well-entrenched. The most direct measure of shareholder pushback-Say-on-Pay votes-shows a record-low failure rate. In both 2024 and 2025, the percentage of failed SOP proposals declined significantly from a peak of 5% in 2022 to just 1%. This near-total acceptance indicates that, for now, the market is priced for a governance status quo where pay packages sail through shareholder votes with minimal friction.

This complacency is mirrored in the reduced influence of the proxy advisors who traditionally act as the first line of defense. The opposition rate from major firms has hit a multi-year low. Glass Lewis issued its lowest rate of SOP opposition (10%) in recent years for 2025, while ISS also maintained a historically low stance. The impact of their "against" recommendations has further diminished, with the failure rate for advisor-opposed proposals falling to about 10% for ISS and 15% for Glass Lewis. In other words, even when advisors push back, shareholders are increasingly ignoring them.

Yet, this apparent calm is a bit of a mirage. While the formal vote is easy, the real battleground for governance is shifting. Shareholder activism is at record levels, and executive compensation has become a primary target. Activist investors are increasingly using executive compensation as a powerful lever to drive corporate governance change. Campaigns have successfully challenged pay at companies like Southwest Airlines and Illumina, arguing that rising pay amid poor stock performance signals a governance failure. The market may be priced for smooth SOP votes, but it is not priced for the more aggressive, performance-driven activism that is now the norm.

The bottom line is a clear asymmetry. The low SOP failure rate and proxy advisor opposition rates reflect a market that has discounted the immediate risk of a governance revolt. However, the accelerating pace of activism focused on pay-for-performance discipline suggests that the underlying pressure is not easing-it's simply changing form. The risk is not in a shareholder vote; it's in a boardroom campaign that starts with pay and aims for broader change.

The Asymmetry of Risk: Catalysts and What Could Break the Consensus

The current consensus view-that shareholder pushback on CEO pay is muted and governance is stable-is built on a fragile foundation of recent performance and low formal opposition. The real risk lies in the asymmetry between this calm surface and the more aggressive, performance-driven activism now emerging. Several forward-looking factors could validate or break this consensus.

First, monitor the 2025 Say-on-Pay outcomes for any divergence from the established trend. The data shows a failure rate tracking at 1% for 2025 year-to-date, mirroring 2024. This near-universal approval is likely tied to the sustained relatively strong 1- and 3-year S&P 500 TSR performance observed in recent years. Any significant break in that TSR trend could test the durability of this support. If shareholder returns stall while pay packages continue to rise, the low failure rate may not hold. The market is priced for smooth sailing, but a stumble in returns could quickly change the calculus.

Second, watch for activist campaigns that specifically target compensation structures. While activism is accelerating globally, the key catalyst will be whether these campaigns explicitly challenge the pay-for-performance linkage. The evidence shows that activist investors are increasingly using executive compensation as a powerful lever to drive corporate governance change. High-profile cases like Southwest Airlines and Illumina demonstrate this playbook. The risk is not in a single failed vote, but in a campaign that starts with pay and uses it to spotlight broader governance failures. A successful, high-profile activist push against a major company's pay plan would signal a shift in the governance landscape, moving pressure from the ballot box to the boardroom.

Finally, assess whether future CEO pay increases continue to align with TSR. The historical pattern is clear: pay rose 6% on average in years with positive TSR, while remaining flat in negative years. The market consensus assumes this discipline will continue. However, the 2024 CEO pay levels will likely increase due to strong TSR of 25%, but the increase in actual 2024 pay may be more modest after the large jump in 2023. The critical test will be 2025 and beyond. If pay increases outpace TSR growth, it would directly challenge the core thesis of alignment. Such a break in the pattern would provide activists and dissident shareholders with a powerful, data-driven argument for change.

The bottom line is that the current consensus is priced for stability. Yet, the catalysts are present. A combination of weak returns, targeted activism, and a decoupling of pay from performance could quickly unravel the calm. The market's complacency is the vulnerability.