Over the last couple of weeks, Elon Musk has been making headlines, as the “Techno king” pushed for a historic $56bn 10-year pay package from Tesla. Though there was a great deal of pushback, his compensation was eventually approved at the only slightly lower amount of $45bn, nearly 500 times higher than the pay of the average CEO in the Russell 3000.
This begs the question: How do CEO compensation packages vary from company to company, and to what degree do they correlate with the size and success of each one?
This note explores these questions within the P&C insurance industry, comparing executive compensation to other sectors, looking at the relative pay in different insurance cohorts, and examining the correlation with value creation over time.
First, comparing CEO pay with value creation, even after accounting for differences in size, there are some significant outliers where the leaders are under- or overpaid relative to the value they have created.
Second, comparing the P&C industry to the constituents of the Russell 3000, we found that insurers fall in the middle in terms of how much they pay their CEOs, with brokers toward the top of the list.
Third, breaking the insurance space down into sectors, there was stratification of pay, which shows that despite the overall average pay, the CEOs of various cohorts are being compensated very differently.
First, Progressive, Selective, Markel, and CinFin CEOs are underpaid, while CNA, James River, and Global Indemnity CEOs are overpaid relative to size and value creation
Tesla isn’t the only company with a surprisingly large pay package. If we take the time to peruse insurance company proxies, we will see some surprising numbers. (See appendix for a list of insurer CEO compensation amounts.)
When thinking about CEO pay, we might assume that pay would be based on the size and success of the company. It’s logical that the CEO of Google is not paid the same as the CEO of Hippo, as they are completely different-sized jobs, and Progressive’s CEO making more than Allstate’s makes sense when looking at their results.
However, if we look at this across the insurance industry, trends show that there is no real rhyme or reason for CEO pay, with some fitting this more intuitive trend, and others coming out of left field with higher or lower pay than competitors.
Below, we show a regression analysis of CEO pay against five-year value creation. Larger companies generally pay more, so we used CEO pay as a percentage of market cap in the analysis and divided the industry into two groups based on size.
The two charts are shown below, with the large companies first, and the smaller second. Both charts show a trendline and have the chart divided between companies with a value creation CAGR under/over 10%.
The first is large companies. Companies higher than the trend line are paid more (relative to market cap) than peers, and vice versa. Looking at the carriers and where they lie, we can see some carriers like Progressive stand out as being paid much lower than peers relative to the value they are creating. On the other hand, CNA is paid much higher than its peers, while being one of the lowest value creators.
We would note here, again, that pay does tend to decrease relative to market cap as the size of the company increases, so we would expect smaller companies to generally be higher up the y-axis here than the large companies. So, for example, it makes sense that RenRe is higher than industry giant Progressive and we would not compare the two.
But on the other hand, it is safe to compare Everest and RenRe which have similar size and sector, and Everest is below the line while RenRe is significantly above, suggesting pay disparity between comparable companies.
(Note that RenRe’s CEO benefitted significantly from the low-cat year as well as the acquisition of Validus, leading to a bonus pay out of 180%, so the timing is affecting the analysis.)
Moving on to the smaller-cap companies, we see even more outliers. Looking at the left side of the chart, we see several carriers who are low value creators (Global Indemnity), or even value destroyers (James River) getting paid much more than competitors. On the right-hand side, we see more carriers closer to the line, suggesting these CEOs are being compensated more fairly relative to peers, with the one possible outlier being Selective, sitting below the line despite a double-digit value creation CAGR.
While these charts make it very clear that there is no universal logic to determining how CEOs are paid in the insurance industry, there are some outliers distant enough that we can still safely draw conclusions.
Since every company’s short, medium, and long-term goals differ, this analysis also needs to be compared with where the company itself is in its trajectory vs the marketplace.
Second, P&C insurer CEOs have average pay relative to other industries, while brokers rank closer to investment banks and asset managers
While the name-by-name analysis shows some interesting outliers, we also wanted to get a sense of how P&C industry pay compares to other sectors. To do this, we analyzed data for all of the constituents of the Russell 3000, grouping them by category. The chart below shows the results of this analysis, with the sectors ranked by how much they pay the average CEO. The blue bars show the relative size of the pay compared to others in the column.
There are several important takeaways from this chart.
1. Brokers are near the top of the list, and they also have the smallest disparity in pay between CEOs and CFOs.
2. P&C Insurance companies are only middling in their ranking, with the average in the single digits.
3. The chart confirms our earlier statement that CEO pay doesn’t correspond to size at this high level (though there is some directionality to it).
A couple of caveats are worth mentioning. First, growth industry CEOs will get paid better than mature industries like insurance. Second, we would caution readers that payments like this are often multi-year deals or one-off bonuses and can somewhat skew the numbers, which is one reason to look at these higher-level numbers to get the real story.
Third, a sector-level analysis shows a correlation between market cap and pay, but reinsurers and brokers are outliers
Our last chart broke down the Russell 3000 by industry to see the insurance sector relative to other industries, but we also wanted to get a sense of how the different insurance sub-sectors stacked up.
The chart below groups carriers by cohort to compare their average pay.
Looking at the general trend, this chart makes a fair amount of sense, despite the noisy underlying data. We see a correlation between the average company size and the average pay for executives in each sector. Larger commercial carrier CEOs are making the most, and the chart tapers down to InsurTech CEOs.
There are two outliers. Reinsurer CEOs are higher than would be expected based on the average market cap, while brokers are lower. These outliers are driven by the one-off payment to RenRe’s CEO, and to the different business model for brokers.
In summary, there is a general link between market cap and CEO pay, but even when controlling for this, the P&C industry has a number of outliers where leaders are being paid significantly above or below the norm.
Appendix
The following chart shows the top 20 CEO pay packages for 2023. Keep in mind that these may include multi-year deals or one-off bonuses. This includes all insurers from our Insurance Insider Select cohort, and therefore has more companies than the list used for the Russell 3000 analysis in the breakdown in the second point.
The chart below combines both of the regression charts shown above. The results look very different as we are now putting large companies like Chubb and Progressive in the same analysis as Donegal, Mercury, etc. In general, smaller companies should be higher up the y-axis than larger companies.
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