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Directors work to establish 'clear line of sight' between pay and performance
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Top U.S. public companies made only slight increases to executive compensation levels in 2012, as emphasis shifted further toward long-term performance incentives, according to newly released results from The Wall Street Journal/Hay Group 2012 CEO Compensation Study.
The study focused on the primary elements of compensation for top executives of the 300 largest U.S. companies, as reported in final proxy statements filed from May 1, 2012, to April 30, 2013.
After seeing CEO pay jump a significant 11 percent in 2010, 2012 marked the second consecutive year that total compensation showed only modest increases. Base salaries rose 1.3 percent to $1.15 million in 2012, while annual incentive payments were flat at $2.1 million.
For the third year in a row, however, long-term incentives increased, growing 3.8 percent to $7 million. In sum, total direct compensation increased a modest 3.6 percent to $10.1 million in 2012.
When it comes to company performance, the story was mixed. The median company showed a slight 2.1 percent increase in net income from 2011, with a very strong 14.4 percent total shareholder return (TSR). That’s a reversal from 2011, when the median company’s net income rose 13 percent from 2010, but its TSR jumped by a modest 3.1 percent.
“Companies sought to make their pay programs more attractive to shareholders, structuring their executive compensation plans to clearly demonstrate alignment between pay and performance,” said Irv Becker, national practice leader of the U.S. Executive Compensation practice at Hay Group. “In the third year of say on pay, many companies held pay levels nearly flat, cut perquisites and turned to performance awards as a way to tie executive pay programs to shareholders' desired outcomes.”
For only the second time in the history of Hay Group’s study, long-term performance plans were the most heavily weighted piece of the entire pay puzzle, making up 31 percent of the average CEO’s total compensation—up from 26 percent the prior year. When it comes to long-term incentives, performance awards made up more than half (51 percent) of the value of incentives that CEOs received in 2012, up from 44 percent in 2011. The prevalence of performance awards also increased in 2012, as they were given by 80 percent of the companies that grant long-term incentives.
Among other findings:
“As boards continue to navigate the say-on-pay era, we expect to see more and more companies turning to direct shareholder engagement to clarify elements of their executive pay programs and proactively offset the commentary or recommendations of shareholder advisory firms,” said Becker. “With more pay linked to performance, and shareholders taking notice, companies’ next challenge will be to tackle some of the more complicated issues that these plans raise—particularly around long-term goal-setting and oversight to ensure executives don’t win when shareholders lose.”
Financial Executives' Pay
A separate study, the 2013Financial Executive Compensation Surveysponsored by Grant Thornton LLP and the Financial Executives Research Foundation, surveyed CFOs, corporate controllers, treasurers and other financial executives from a broad range of private and public companies in the U.S. The survey was fielded from November 2012 through January 2013. Among the findings:
Stephen Miller, CEBS, is an online editor/manager for SHRM.
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