CEO Pay Mix Is Changing, Emphasizing Long-Term Incentives

Active shareholders are a growing consideration for compensation committees

By Stephen Miller, CEBS Jun 26, 2015

In determining the recipe for CEO compensation at top U.S. public companies last year, market enthusiasm that has been driving pay levels higher was tempered by the impact of active shareholders as a growing consideration for compensation committees, according to results from The Wall Street Journal / Hay Group 2014 CEO Compensation Survey, released in June 2015.

The study examined CEO pay at the 300 largest public companies in the U.S. by revenue, based on final proxy statements filed from May 2014 through April 2015. The study revealed that pay for chief executives at these firms grew 4.6 percent last year, though at a slower rate than the previous year, which saw a median growth rate of 7.3 percent.

CEO’s rising compensation included:

Base salary growth of 2 percent.

Short-term (annual) incentive payments growth of 4.3 percent.

Long-term incentive (LTI) payment growth of 5.6 percent.

“With a strong economy throughout 2014, companies took advantage of stable conditions to focus attention inward on better balancing the mix of incentives in the executive pay package,” said Irv Becker, national practice leader of the board solutions practice at Hay Group, a pay consultancy. “Active shareholders have also added a new flavor to the discussion about CEO compensation and continue to drive boards to emphasize performance-based incentives.”

Key findings from the survey include the following:

Performance has become the largest ingredient in LTI plans.

Performance awards accounted for more than half (51 percent) of all long-term incentives awarded in 2014. This shift comes as the emphasis on stock options continues to decline as a portion of the pay package, dropping to 16 percent from 17 percent in 2013. Once the largest ingredient in the CEO pay mix, options grants have steadily declined in prevalence over the past 10 years. Meanwhile, restricted stock awards remain consistent at 24 percent of LTIs over the past three years.

“Companies are placing less emphasis on time-based vehicles, such as stock options and restricted stock, as part of the executive pay recipe,” Greg Kopp, senior principal in the board solutions practice at Hay Group explained. “The impact of active shareholders’ drive for more performance-linked pay is clearly visible here.”

Companies have maintained a portfolio-approach to LTIs.

Eighty-three percent of companies that granted LTIs in 2014 used more than one vehicle, up from 79 percent in 2013. The most prevalent combination (used by 29 percent of companies) included all three (stock options, restricted stock and performance awards). The next most popular combination consisted of stock options and performance awards (26 percent), followed by the combination of performance awards and restricted stock (23 percent). In each of these top three LTI portfolio combinations, performance-based awards made up a majority of the pay mix, while restricted stock has become the smallest component.

Perks face additional cuts.

Last year continued the multiyear trend of cuts to executive perquisites, though the rate of cuts remained low. Tax gross-ups continued their march toward zero, appearing in only 9.4 percent of company reports, compared to 14 percent in 2013. Club memberships, supplemental life and disability insurance policies and financial planning perks also declined.

Changes have been made to nonqualified deferred compensation and pension values.

Adjustments made to mortality estimates in actuarial tables in 2014 spiked the book value of CEO compensation, as companies set aside higher contributions to meet longer expected retirement plan payouts. The change in value accounted for just over 10 percent of the change in total CEO compensation for the year. Comparatively, adjustments in 2013 only impacted 4 percent of CEOs’ total reported compensation.

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow Me on Twitter.


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