Big Jump in Executive Pay, Proxy Statements Show

Growth seen in long-term incentive programs

By Stephen Miller, CEBS May 10, 2011

CEO pay levels increased at a marked rate over 2009, buoyed by strong company performance, according to results from the Wall Street Journal/Hay Group 2010 CEO Compensation Study, which examined how CEOs at large companies were compensated across all forms of pay in fiscal year 2010.

The study focused on the primary elements of compensation for CEOs of the 350 largest U.S. companies to file their final definitive proxy statements between May 1, 2010 and April 30, 2011. Among the findings:

After two years of declines, total direct compensation for CEOs jumped 11 percent in 2010 to $9.3 million.

Base salaries remained flat at $1.1 million, while annual incentive payments increased by 19.7 percent to $2.2 million, yielding a 12.8 percent increase in overall cash compensation at $3.4 million.

For the first time in two years, long-term incentives grew by 7.3 percent to $6.2 million.

Pay levels aligned with strong results in company performance, with surveyed companies achieving a median 17 percent increase in net income and providing a total shareholder return of 18 percent.

“CEO pay has been under significant scrutiny, and some may have expected to see a different outcome in the 2010 proxies,” said Irv Becker, national practice leader of the U.S. Executive Compensation Practice at Hay Group. “But don’t let the figures misguide you," he added. “The real story is under the hood of executive pay. Many companies have re-structured programs to align pay with performance by putting greater emphasis on performance-oriented long-term incentive programs.”

Shifting Gears

The study found that companies reversed course in 2010, steering away from retention-oriented time-vested stock plans and toward plans that pay out only when companies achieve long-term objectives. One of the strongest indications of this shift is seen by looking at long-term incentive (LTI) programs for CEOs:

Performance awardsrose to 41 percent of LTI value in 2010, up from 37 percent in 2009.

Stock options declined to 34 percent of LTI value in 2010, down from 39 percent.

Time-vested restricted stock essentially remained flat at 25 percent of LTI value (up from 24 percent).

Companies further diversified by increasing the number of LTI vehicles used:

Stock options were used by 70 percent of the surveyed companies (up from 64 percent in 2009).

Long-term performance planswere used by 68 percent of companies (up from 58 percent).

Time-vested restricted stock was used by 55 percent of companies (up from 46 percent).

“The trend now is for companies to take more of a portfolio approach to long-term incentive grants in order to better achieve multiple objectives,” said Becker.

Fewer Perks

The study found that 55 companies (16 percent of the sample) eliminated at least one executive perquisite. Atop this list were tax gross-ups, with 28 companies (8 percent) eliminating these, followed by 10 companies eliminating country club memberships (3 percent).

Personal use of the corporate aircraft remained the most prevalent executive perk, provided by 219 companies (63 percent).

Industry Snapshots

Among notable industry findings from the study:

The basic materials sector showed the biggest pay increase (27.7 percent) on the strength of a 60.4 percent increase in net income.

Health care companies showed the smallest increase (0.2 percent) and the second-smallest increase in profitability at 7 percent.

The financial sectorshowed the most interesting results, with a modest pay increase (1.2 percent) despite a 26.1 percent increase in profitability—an indication that boards are being cautious amidst regulatory and public scrutiny.

“The 2011 proxy season hasn’t been much of a test of shareholders’ views on executive pay programs, with few using their advisory vote to oppose pay decisions,” said David Wise, senior principal in the U.S. executive compensation practice at Hay Group. “As shareholders continue to take on greater accountability in pay discussions, we expect them to place less emphasis on the opinions and analyses of shareholder advisory groups and more on better communication with boards and management.”

Stephen Miller, CEBS, is an online editor/manager for SHRM.


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