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CEO Compensation Rebounds, Shareholders Say 'OK'
Most companies receive strong shareholder support in say-on-pay votes

By Stephen Miller, CEBS  4/15/2011
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Compensation for CEOs at the biggest U.S. corporations rebounded strongly in 2010, largely because of improved company performance and a rising stock market, according to an analysis of proxy statements conducted by consultancy Towers Watson. In addition, the analysis found that in the first quarter of 2011, most companies received strong shareholder support for their say-on-pay proposals.

The Towers Watson analysis, based on a review of proxy statements filed by 170 Fortune 1000 companies by late March 2011, found that:

  • The median total cash compensation, which includes base salary as well as annual and discretionary bonus payments, increased 17 percent for CEOs in 2010 vs. a 3 percent median increase in 2009.
  • Total direct compensation, which includes total cash compensation plus the grant value of long-term incentives, including stock options, restricted stock and long-term performance plans, increased 9 percent in 2010 vs. a decrease of 1 percent in 2009.

(In contrast, a Hewitt Associates survey of large U.S. companies found that base pay for salaried exempt workers rose just 2.4 percent in 2010, up from the record-low pay raises of 1.8 percent that workers saw in 2009.)

The Bonus Factor

Annual bonuses were a big factor in the double-digit increase in CEOs' total cash compensation, Towers Watson found:

  • Bonuses in excess of 100 percent of their 2010 target annual bonus were received by nearly three out of four U.S. CEOs (72 percent). That’s the largest percentage of CEOs to have received more than 100 percent of their target bonus since 2007.
  • Conversely, only 8 percent of CEOs received no bonus or less than half of their target bonus, a sharp decline from 21 percent the previous year.

“Compensation for CEOs has returned to levels we haven’t seen since before the economic crisis,” said Doug Friske, global head of executive compensation consulting at Towers Watson. “CEO pay declined or remained flat in years when corporate profits were weak and then rebounded when profits and the stock market recovered.”

Companies Changing CD&As

The Towers Watson analysis found that many companies are making changes to the Compensation Discussion and Analysis (CD&A) sections of their proxies. One-half of the companies Towers Watson studied added an executive summary to their 2011 proxy statements. As a result, nearly two-thirds (64 percent) of companies feature an executive summary. Additionally, 85 percent disclosed specific performance goals for the 2010 plan year, while more than three-fourths (78 percent) showed actual performance attained for 2010 to support the annual bonus paid.

“With investors and other stakeholders seeking more clarity in CD&As, it’s no surprise that many companies are taking steps to enhance them,” said Friske. “Companies want to improve their shareholder communication of the linkage between their compensation philosophies and executive pay practices, and many have succeeded in developing documents that allow them to communicate in a simple and straightforward manner. This has been an integral part of the planning process for say-on-pay votes for most companies.”

Strong Shareholder Support

"Say on pay" refers to nonbinding shareholder votes on executive compensation, required beginning in 2011 under the Dodd-Frank financial reform law. Dodd-Frank requires that public companies:

  • At least every three years conduct say-on-pay votes, but leaves it to each company to decide whether it will hold annual, biennial or triennial votes.
  • At least every six years put the say-on-pay frequency question to a nonbinding shareholder vote.

Companies that have disclosed 2011 say-on-pay voting results reported:

  • Only four companies failed to win majority support for their say-on-pay proposals through the first quarter of 2011.
  • Three-fourths of the proposals won more than 90 percent support.

Additionally, 76 percent of companies have seen majority shareholder support for holding say-on-pay votes annually. Only one-third of companies recommending triennial votes received majority support.

“Based on our analysis, it appears that most companies are getting it right in terms of their executive pay practices, although many continue to fine-tune their approaches,” Friske said. “In the say-on-pay environment, shareholders and other constituents are watching closely. Companies are well aware that circumstances, perspectives and priorities can change quickly, and there’s no room for complacency.”

Stephen Miller, CEBS, is an online editor/manager for SHRM.

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