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CEO Pay for Performance Hits a Bump in the Road
 

By Stephen Miller  4/9/2010

Large U.S. companies made few changes to overall CEO pay levels in 2009, despite a year of remarkable turbulence for executive pay, according to results from The Wall Street Journal/Hay Group 2009 CEO Compensation Study. But among the notable findings, performance-based plans increased only slightly while time-vested incentives saw a strong rebound.

The Wall Street Journal partners with consultancy Hay Group on the annual study, which examines how CEOs were compensated across all forms of pay in fiscal year 2009.

The 2009 study focused on 200 U.S. companies with more than $4 billion in annual revenue that filed their proxy statements between October 2009 and the end of March 2010. Among the key findings:

For the second year, pay levels for CEOs decreased in 2009, but only modestly. Base salaries were flat at $1,030,000 while annual incentives grew 3.4 percent to $1,523,701, yielding an overall cash compensation increase of 3.2 percent to $2,637,884.

When factoring in long-term incentives (LTI), which fell 4.6 percent to $5,007,556, total direct compensation for CEOs fell a modest 0.9 percent to $6,947,976.

At the same time, 2009 pay practices edged away from the pay-for-performance momentum of the previous two years, as many companies began to reduce emphasis on performance-based LTI plans in favor of time-vested plans and paid out higher bonuses for less profitable results. Among the study findings:

Stock options re-emerged as the dominant LTI vehicle, with 70 percent of companies using them (up from 63 percent in 2008).

Performance-based plans stayed in the mix, increasing slightly to 66 percent of companies (up from 64 percent in 2008).

Time-vested restricted stock showed the biggest jump, with 48 percent of companies using the LTI vehicle in 2009 (up from 34 percent in 2008).

“During a year when compensation committees faced unprecedented shareholder, governmental and public pressure, many expected to see landmark changes in the way CEOs were compensated in 2009,” said Irv Becker, national practice leader of the U.S. executive compensation practice at Hay Group. “Instead, we found many compensation committees were focused on retention of their top talent, putting significant long-term value back on the table for executives and lowering the bar on annual performance targets. The combination of the two made pay programs less performance-based.”

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Comp committees focused on talent retention and
lowered the bar on annual performance targets.

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Fewer 'Perks'

Perquisites, which remain a hot button issue as executive pay watchdogs track their use, were reduced by 22 percent of top U.S. companies in 2009, according to the study. Nearly every type of perk declined in prevalence, led by reductions in tax gross-ups on perks themselves. Moreover, use of a company car and spousal travel showed double-digit percentage declines.

For the second year in a row, the most prevalent perk remained personal use of corporate aircraft, which declined only modestly from 2008.

Other study highlights include:

Shareholder return increased despite a decline in company performance. The median company’s net income declined 5 percent from 2008 but showed a significant one-year total shareholder return (TSR) of 21.5 percent. “Despite having made less money than in 2008, companies created remarkable value for shareholders in 2009,” said Becker. “A return of investor optimism to the market contributed to shareholders regaining much of the value they lost during a turbulent 2008.”

Technology companies saw a sharp decline in pay while consumer services soared. The sharpest declines in executive pay were seen in the technology sector, where total direct compensation declined 10.1 percent in 2009 against a net income drop of 19.1 percent. On the other end of the spectrum, consumer services companies had a strong year, with a growth in net income of 13.7 percent and an increase in total direct compensation of 5.6 percent.

Financial services companies rebounded but pay remained flat. The industry at the center of the economic downturn—financial services—showed the greatest rebound in performance with a 20.2 percent increase in net income off of a horrific 2008. But perhaps in acknowledgement of the hostile environment for banking pay, pay levels remained flat.

“Looking forward, it’s clear that shareholder empowerment and the role of risk in compensation will impact the way compensation committees evaluate executive pay,” said Becker. “As companies prepare for 2010 and beyond, it’s critical that they learn what really matters to shareholders and engage them in a productive dialogue about these executive pay issues.”

Stephen Miller is an online editor/manager for SHRM.

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