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Growth in top executives' pay slowed in 2012; incentives tied to shareholders' returns
CEOs of the largest U.S. companies made 354 times what the average worker was paid in 2012—the widest pay gap in the world—according to a new analysis by the AFL-CIO. At S&P 500 companies CEOs received, on average, $12.3 million, while ordinary rank-and-file workers took home around $34,645.
The union's updated Executive Paywatchwebsite, based on Securities and Exchange Commission filings, showed CEO-to-worker pay disparities rapidly increasing. Thirty years ago CEOs were paid 42 times what rank-and-file workers in the U.S. earned, according to the labor federation.
"In Switzerland, where voters recently imposed new limits on executive pay, the CEO-to-worker pay gap is 148 times,” the AFL-CIO reported. “In the United Kingdom, the CEO-to-worker pay gap is one-quarter as large as ours. And in Japan, the gap is even smaller.”
The AFL-CIO and other labor advocates areurgingthe Securities and Exchange Commission to issue a rule that would enforce aprovision of the Dodd-Frank Act requiring public companies to report CEO-to-worker pay ratios. Some business groups areopposed to such reporting. Unions successfully have used workers' perception of extreme disparities between their wages and executive pay in organizing campaigns and contract negotiations.
Slower Growth in CEO Pay Found
In another executive-compensation report, growth in CEOs’ pay at the nation’s largest corporations, as reported in filings by S&P 1500 companies, slowed considerably in 2012, reflecting weakening company financial performance last year.
In an analysis of proxy statements, HR consultancy Towers Watson found that total pay for CEOs increased just 1.2 percent in 2012, down from the 6.7 percent median increase these executives received in 2011.
Total pay, as reported in the Summary Compensation Table in company proxies, includes base salary, actual annual and long-term cash bonuses, and the grant-date value of long-term incentives stock options, restricted stock and long-term performance shares.
The smaller rise in total pay was driven largely by a steep decline in annual bonuses. While salary increases slowed slightly—from 3.0 percent in 2011 to 2.8 percent in 2012—annual bonuses paid to CEOs dropped by 16 percent at the median, compared with 2011 when bonuses were relatively flat. Lower bonuses were mostly attributed to a slowdown in sales and earnings.
“The fact that many CEOs saw their bonuses take a significant hit and Summary Compensation Table pay was relatively flat suggest the companies and their boards took a conservative approach to pay in 2012,” said Todd Lippincott, Towers Watson's executive compensation leader.
Incentives Tied to Shareholders' Returns
Almost half (44 percent) of S&P 1500 companies now have long-term performance plans in place, according to the Towers Watson analysis. Total return to shareholders (reflecting stock appreciation and dividends) is now the most prevalent performance metric that companies base their long-term incentive-plan awards on. More than four in 10 companies (41 percent) use this measure, compared with just 18 percent that used it in 2008.
Earnings per share, historically the most prevalent measure, are now used by 40 percent of companies.
The increased focus on shareholders' returns reflects the importance of mandatory but nonbinding shareholder say-on-pay votes at public companies, now in their third year. Companies that disclosed their shareholder voting results as of April 2013 reported that, in votes cast this year, the average support for management was at 90 percent, consistent with last year’s voting results.
“While the say-on-pay experience has been positive for most companies, we continue to see a small number of cases in which shareholders use the vote to send companies a message about pay and performance,” said Lippincott. “Companies with poor shareholder returns were five times as likely as other companies to receive low say-on-pay support, while those with high CEO pay [relative to their industry peers] were eight times as likely.”
Stephen Miller, CEBS, is an online editor/manager for SHRM.
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