Top U.S. public companies made only slight increases to executive compensation levels in 2012, as emphasis shifted further toward long-term performance incentives, according to newly released results from The Wall Street Journal/Hay Group 2012 CEO Compensation Study.
The study focused on the primary elements of compensation for top executives of the 300 largest U.S. companies, as reported in final proxy statements filed from May 1, 2012, to April 30, 2013.
After seeing CEO pay jump a significant 11 percent in 2010, 2012 marked the second consecutive year that total compensation showed only modest increases. Base salaries rose 1.3 percent to $1.15 million in 2012, while annual incentive payments were flat at $2.1 million.
For the third year in a row, however, long-term incentives increased, growing 3.8 percent to $7 million. In sum, total direct compensation increased a modest 3.6 percent to $10.1 million in 2012.
When it comes to company performance, the story was mixed. The median company showed a slight 2.1 percent increase in net income from 2011, with a very strong 14.4 percent total shareholder return (TSR). That’s a reversal from 2011, when the median company’s net income rose 13 percent from 2010, but its TSR jumped by a modest 3.1 percent.
“Companies sought to make their pay programs more attractive to shareholders, structuring their executive compensation plans to clearly demonstrate alignment between pay and performance,” said Irv Becker, national practice leader of the U.S. Executive Compensation practice at Hay Group. “In the third year of say on pay, many companies held pay levels nearly flat, cut perquisites and turned to performance awards as a way to tie executive pay programs to shareholders' desired outcomes.”
For only the second time in the history of Hay Group’s study, long-term performance plans were the most heavily weighted piece of the entire pay puzzle, making up 31 percent of the average CEO’s total compensation—up from 26 percent the prior year. When it comes to long-term incentives, performance awards made up more than half (51 percent) of the value of incentives that CEOs received in 2012, up from 44 percent in 2011. The prevalence of performance awards also increased in 2012, as they were given by 80 percent of the companies that grant long-term incentives.
Among other findings:
- Companies maintained a portfolio approach to long-term incentives. Eighty-one percent of companies that granted long-term incentives used more than one vehicle, with the most prevalent combination (30 percent) including all three long-term incentive vehicles (i.e., stock options, restricted stock and performance awards). The next most popular combination consisted of stock options and performance awards (27 percent), followed by the combination of performance awards and restricted stock (17 percent).
- Perks faced additional cuts. After several years of very few year-over-year changes in perquisites, the pace of change increased significantly in 2012 for nearly every executive perk. For the fourth consecutive year, tax gross-ups on post-tax benefits was the most eliminated perk. Personal use of corporate aircraft remained the most prevalent perk, with 65 percent of companies offering this benefit to their CEOs.
“As boards continue to navigate the say-on-pay era, we expect to see more and more companies turning to direct shareholder engagement to clarify elements of their executive pay programs and proactively offset the commentary or recommendations of shareholder advisory firms,” said Becker. “With more pay linked to performance, and shareholders taking notice, companies’ next challenge will be to tackle some of the more complicated issues that these plans raise—particularly around long-term goal-setting and oversight to ensure executives don’t win when shareholders lose.”
Financial Executives' Pay
A separate study, the 2013 Financial Executive Compensation Survey sponsored by Grant Thornton LLP and the Financial Executives Research Foundation, surveyed CFOs, corporate controllers, treasurers and other financial executives from a broad range of private and public companies in the U.S. The survey was fielded from November 2012 through January 2013. Among the findings:
- CFO base pay. For public-company corporate CFOs, the average base salary was $248,900, with an average annual bonus of $81,700. For private-company corporate CFOs, the average base salary was $201,700, with an average bonus of $54,300.
- Controller base pay. The average base salary for public-company corporate controllers was $207,200, with an average annual bonus of $65,000; for private-company corporate controllers it was $145,400, with an average annual bonus of $37,200.
- Salary increases. The estimated average salary increase for financial executives in 2013 was 3 percent, down from 4 percent in 2012. For public companies, the average salary increase was 3.5 percent; for private companies the average salary increase was 3.1 percent.
- Long-term incentives. Just 22 percent of financial executives received a long-term cash incentive (sometimes in the form of deferred compensation), down from 26 percent in 2012. However, 46 percent received some form of long-term stock-based incentive compensation, typically stock options or restricted shares.
- Performance measures. For financial executives eligible for long-term incentives (cash, stock-based or other), the most common measure for determining payouts was base salary level (66 percent), followed by more specific company performance measures such as goals and objectives (41 percent) and discretionary measures (36 percent). The use of EBITDA as a performance measure (30 percent) has continued to increase, as well.
- Short-term incentives. Nearly 70 percent of financial executives reported having an annual target bonus level. For those who received an annual bonus, the average amount was $52,093.
- Perquisites. The perks financial executives reported receiving have remained stable during the last few years, with 77 percent receiving a cellphone; 22 percent, an airline club membership; and 18 percent, a company car or car allowance. Eight percent reported receiving country club memberships and relocation assistance, and 2 percent reported receiving housing and other living expenses.
- Employment contracts. Most financial executives (63 percent) were not covered by an employment contract. For those executives who were, the most common element was change-in-control severance (26 percent), followed by severance based on number of months employed (25 percent).
Stephen Miller, CEBS, is an online editor/manager for SHRM.
CEO-to-Worker Pay Disparity Increases, SHRM Online Compensation, April 2013
Executive Pay: How Much Is Too Much?, SHRM Online Compensation, October 2012
Making Executive Pay Work, SHRM Online Compensation, June 2012
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