CEO Pay Rose 6% Last Year, Reflecting Modest Corporate Growth

Long-term incentives and annual bonuses outpaced salary rise

By Stephen Miller, CEBS Apr 19, 2017
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Annual compensation for CEOs at large U.S. companies rose 6 percent in 2016, slightly more than the 4 percent increase that corporate leaders received the previous year and down significantly from a 12.1 percent increase in 2014. But last year's executive pay raise was still about double the 3 percent increase that most nonexecutive employees saw.

Increases in CEO compensation remained moderate due to uneven corporate performance, a continuing shift to variable pay and a sharp decrease in the value of stock option exercises, according to an analysis by Willis Towers Watson. The consultancy examined S&P 1500 companies that had not changed CEOs from 2015 to 2016, as reported in company proxy statements filed through March of this year.

"The modest increase in CEO pay should come as no surprise in view of the relatively lackluster financial performance of companies in many sectors of the economy in 2016," said R.J. Bannister, head of Willis Towers Watson's executive compensation consulting practice in North America. "A strong second half offset a weak first half, resulting in generally flat to moderate performance improvement over several performance metrics."

But with signs that economic conditions may improve this year, along with discussions in Washington about tax reform and possible legislative efforts to repeal or limit the executive pay provisions of the Dodd-Frank Act, "companies will need to carefully monitor and manage their executive pay programs to ensure they maintain a strong link between pay and performance," Bannister said.

The analysis broke out the components of CEO pay as follows:

  • Target long-term incentives (LTIs) such as stock options, restricted stock and long-term performance shares—the largest component of total CEO pay at major companies—increased 4 percent at the median in 2016, down from an increase of 9 percent in 2015.

  • Annual bonuses increased 5 percent at the median, mostly flat with the previous year.

  • CEO salaries increased 2 percent in 2016, following a similar 2 percent increase in 2015.

Shareholders still support executive pay decisions. Through March 31, shareholder approval for say-on-pay resolutions averaged 92 percent—roughly the same level of support as in each of the first five years of mandatory say-on-pay shareholder voting as required by the Dodd-Frank Act.

[SHRM members-only toolkit: Designing Executive Compensation Plans]

Long-Term Performance Metrics.

LTI plans continue to evolve toward performance-based metrics as opposed to time-vested rewards. The analysis showed that the most common LTI metrics were:

  • Total shareholder return (used by 57 percent of S&P 1500 companies).
  • Earnings per share and net income (29 percent).
  • Operating income (22 percent).

In addition:

  • 55 percent of LTI value at the largest companies and 42 percent of LTI value at smaller public companies was based on achieving performance goals.

  • Most companies (59 percent) paid their CEOs annual LTI awards that were at or above target levels in 2016 versus 58 percent in 2015.

Year-End Bonus Adjustments

Almost one in five companies made discretionary adjustments to annual bonus payouts at the end of 2016. About a third (34 percent) of these companies increased payments, and nearly half (48 percent) decreased payments, while others did some of both or added additional incentive awards.

"Companies are primarily using discretion in incentive payments to strengthen the pay and performance link, with virtually all of the adjustments being made to annual payments," Bannister said. "More than a third of the companies that used discretion to make adjustments cited strengthening the link between pay and performance as the reason."

Adjustments were most often made for exceptional, one-time events that the board's compensation committee viewed as significant although not part of the plan performance metrics. "This illustrates that compensation committees are exercising discretion and making payout adjustments to consider performance holistically, to motivate employees and to ensure payouts are fair based on what management can control," Bannister noted.

CEO Pay at the Biggest Firms

Separately, an analysis by the Wall Street Journal reported that last year CEO pay at S&P 500 companies—the largest U.S. firms—rose 6.8 percent, with most of the increase awarded in various forms of restricted stock or stock options to link leaders' pay with long-term corporate performance. David Yermack, a finance professor at New York University’s Stern School of Business, told the Journal that regular shareholder votes on executive pay have forced boards "to do their homework" in better tying CEO pay packages to performance.

Others contend that companies could still do more to link leaders’ pay with long-term corporate performance, noting that some of the best-paid CEOs were at companies in turmoil. For instance, the Journal reported that Philippe Dauman, who was forced out as chief of media giant Viacom in August, made $93 million during the year.

Related SHRM Articles:

CEO Pay Dips for First Time in 5 Years, SHRM Online Compensation, August 2016

CEOs Vastly Overpaid, Most Americans Say, SHRM Online Compensation, March 2016

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