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Smaller short-term incentives and faltering stocks take a bite out of total compensation
CEO pay is down for the first time in at least five years. Last year, median compensation for CEOs of S&P 500 companies was $10.3 million compared to $10.6 million in 2014, according to an analysis from the consultancy Mercer.
The lower pay package comes at a time of falling income among the companies and lower short-term incentives for the top bosses. Median revenue among the companies fell from $9.7 billion in 2014 to $9.4 billion in 2015. Short-term incentives for CEOs declined from $2 million to $1.9 million over the same period, according to the analysis.
"Since virtually all companies incorporate profit in some form with their short-term incentives, it stands to reason that payouts associated with these metrics would be reduced," said Ted Jarvis, Mercer's global director of executive rewards data, research and publications.
Meanwhile, long-term incentives for CEOs across all S&P 500 corporations were up slightly—1 percent, to $7.4 million. That modest growth came primarily from smaller companies. The largest companies—the S&P 100—actually reduced long-term incentives by 4 percent. The S&P 100 companies also showed restraint on other aspects of pay, with median base salaries for CEOs unchanged from 2014 to 2015. The other, smaller 400 S&P companies increased base pay by a little more than 1 percent.
The difference between the pay practices of the larger and smaller companies may be due to difficulties in the energy industry, which is highly represented in the S&P 100, according to Jarvis. Falling oil prices have hurt profits and may be a drag on executive pay.
Use of Stock Options Declines
The use of stock options as a compensation vehicle has declined significantly in recent years, while performance-based rewards have gained favor, the Mercer analysis shows. Among S&P 500 companies, the prevalence of stock options dropped from 72 percent in 2011 to 57 percent in 2015. Over the same period, the use of performance-based shares increased from 76 percent to 87 percent.
The decline in the use of stock options was more pronounced among the larger S&P 100 companies, which granted them at a rate of 50 percent last year, down from 73 percent in 2011. "If these trends continue, grants of stock options will become a minority practice among this group in the future," Jarvis said.
The long-term uncertainty surrounding the value of stock options and pressure from outside parties to boost corporate performance have been driving these recent trends. "The growth in full-value, performance-based share awards and diminishment in option usage reflects a rational bias towards the most efficient use of shares from an accounting perspective and in response to the view of proxy advisor firms," said Jack Connell, a partner with Mercer who specializes in executive compensation.
A Temporary Development?
A separate study from the left-leaning Economic Policy Institute (EPI) also concluded that CEO compensation was lower in 2015 than the previous year. But it's likely that the decline is only temporary and CEO compensation will rebound as the economy gets stronger, the study said.
Average compensation for CEOs at the top 350 U.S. companies was $15.5 million in 2015, down from $16.3 million the previous year, according to the study. It defined compensation to include salaries, bonuses, restricted stock grants, long-term payouts and the value of realized stock options.
EPI estimated that the top CEOs took home 276 times more pay in 2015 than a typical worker. That's down from the CEO-to-worker compensation ratio of 302-1 in 2014, but still much higher than in the past. In 1965, for example, the compensation ratio was 20-1, according to EPI.
The drop in CEO pay in 2015 was primarily due to a faltering stock market, rather than any structural change in how CEOs are paid. Due to depressed stock prices, fewer CEOs cashed in their stock options, which led to lower overall compensation, the study concluded.
"The stock price of any given company is largely a reflection of the stock market overall, not its CEO's performance," said Lawrence Mishel, president of EPI. "CEO compensation will likely resume its upward trajectory when the stock market moves up again."
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