CEO Pay Levels Soar, Along with Shareholder value

Perks remain on the chopping block

By Stephen Miller, CEBS Jun 5, 2014

CEO pay at top U.S. public companies rose in 2013 by the largest percentage since 2010, in part because shareholders experienced record-breaking performance, according to results from The Wall Street Journal/Hay Group 2013 CEO Compensation Study. Compensation for top executives increasingly is linked to total shareholder return (TSR) according to the study, which focused on compensation for CEOs of the 300 largest public companies by revenue to file proxy statements by April 30, 2014.

Following two years of only modest increases to total compensation, CEOs experienced a material uptick in pay in 2013:

  • Base salaries grew 1.7 percent to $1.2 million.
  • Annual incentive payments increased for the first time since 2010, jumping 4 percent to $2.3 million.
  • Long-term incentives (LTI) increased for the fourth year in a row, growing 3.8 percent to $7.9 million.

In sum, total direct compensation increased 5.5 percent to just more than $11.4 million.

A Banner Year

While the median rise in pay was greater in 2013 than in the two years prior, it lagged significantly behind the growth in company net income and TSR. In 2013, the median company showed a net income growth of 8 percent and a TSR of 33.8 percent. That's compared to a modest 2.1 percent median net income growth and a still-strong 16.3 percent TSR in 2012.

"Companies and their shareholders experienced a banner year in 2013, but increases to executive payouts remained modest by comparison as compensation committees continued to be cautious about shareholder perception of executive pay," said Irv Becker, national practice leader of the U.S. executive compensation practice at Hay Group. "This year's results reflect the ongoing impact shareholder activism has on how companies approach and communicate their executive pay plans, with boards increasingly focusing on performance-based design elements."

For the third year in a row, long-term performance plans (equity and cash) were the most heavily weighted piece of the entire pay puzzle, making up 32.3 percent of the average CEO's total direct compensation, up from 30.3 percent in 2012. Bonuses were the second-heaviest weighted component of pay, making up 22 percent of the average CEO's total direct compensation, compared to 23.2 percent in 2012.

"Performance awards continue to be the most important executive pay element in the eyes of shareholders," said David Wise, vice president and market leader in the Northeast U.S. for Hay Group, in the same release. "While some companies implement them to appeal to shareholder concerns, more companies are using these plans as roadmaps for the execution of their long-term strategies.”

A New Mix

Other key findings from the 2014 study include:

  • A portfolio approach to LTI. Seventy-nine percent of companies that granted LTI in 2013 used more than one vehicle, with the most prevalent combination (used by 31 percent of companies) including all three (i.e., stock options, restricted stock and performance awards). The least-used LTI plan design in 2013 was the once-popular use of 100 percent stock options (now used by less than 4 percent of companies).
  • Perks faced additional cuts. After a year of significant cuts to perquisites in 2012, last year brought slower but continued elimination of perks. Spousal travel benefits were the fastest-declining perk in 2013, falling to 20 percent prevalence, while personal use of the corporate aircraft remained the only perk to be provided by more than half (64.7 percent) of companies.

“During the past several years, companies have taken large strides toward bulletproofing their CEO pay plans, but in today's say on pay era, compensation programs continue to face immense scrutiny," said Becker. "Looking ahead, it will be critical for compensation committees to continue to address shareholder concerns and 'hot button' issues, while also ensuring that pay programs are tailored to the strategic needs of their company."

Say on Pay Votes Reflect Shareholder Approval, with Exceptions

Based on 2014 shareholder “say on pay” voting results reported through May 16, the 91 percent average support for executive pay in 2014 is consistent with the 90 percent support observed over all of 2013, according to a report by consultancy Towers Watson.

At companies that failed say on pay votes, engagement activities and compensation program changes often fell short of fully addressing shareholder concerns, according to the report. Moreover, at companies with failed votes, leadership often was concentrated with the CEO, who was frequently the company founder or occupied both the CEO and board chairman roles with no additional independent board leadership.

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


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