Executive Pay and Company Performance Often, but Not Always, in Sync

By Stephen Miller Aug 10, 2010
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The CEOs of companies with the best performance—expressed by total shareholder return year-over-year—did not necessarily receive the highest pay increases, according to research by professional services firm BDO that examined the link between executive pay and company performance in 10 cities across the U.S.

The 2010 BDO Compensation Trends by City Study examined the change in CEO compensation for companies ending their fiscal years in December 2009 or later, compared to the total shareholder return at the top 25 performing companies and the bottom 25 performing companies across 10 U.S. cities: Atlanta, Boston, Chicago, Washington, D.C., Houston, Los Angeles, Miami, New York, and San Francisco.

Overall, CEOs of companies with positive shareholder returns received pay increases and those with negative shareholder returns saw pay decreases. But there were notable exceptions to this trend, especially in the margins for each group.

When comparing the bottom tier of the top performing companies with the top tier of the bottom performing companies across all 10 cities, the links between pay and performance became elusive. The one constant across all 10 cities is that CEO compensation decreased (by 21 percent) for the companies with positive shareholder returns who were on the lowest quartile. According to the BDO report, this may be attributed to the fact that while year-over-year shareholder returns are up, they are likely bouncing back from extreme lows due to the financial crisis and still have not returned to pre-crisis levels, prompting a more conservative approach to managing pay.

Conversely, the top tier of the bottom performing companies saw a median increase of 9 percent, possibly a sign of a more liberal approach to managing pay by rewarding efforts to minimize losses while offering incentives for turnaround and retention of executives, according to DBO.

Chicago, Atlanta and Los Angeles had the smallest discrepancy between pay and performance with each seeing an average of 30 percent difference in pay vs. performance, as opposed to a 110 percent difference in New York, 80 percent in Houston and 75 percent in Dallas. The chart below shows median shareholder return compared to pay increases in the top 25 and bottom 25 performing companies in each city:

Top 25 Performing Companies:

Bottom 25 Performing Companies:

City

Shareholder returns

CEO pay increases

City

Shareholder returns

CEO pay decreases

New York

243%

10%

San Francisco

4%

-9%

San Francisco

155%

-14%

Miami

-1%

0%

Houston

152%

5%

Washington, D.C.

-5%

-4%

Dallas

135%

6%

Atlanta

-7%

-25%

Miami

109%

2%

Chicago

-10%

-9%

Boston

86%

1%

Los Angeles

-11%

2%

Washington, D.C.

85%

37%

Dallas

-13%

0%

Atlanta

74%

45%

Boston

-13%

-10%

Chicago

63%

4%

Houston

-19%

-10%

Los Angeles

58%

10%

New York

-27%

-17%

“Tying pay to company performance is critical now given the increased scrutiny both from regulators and shareholders around executive pay,” said Mike Conover, senior director in the compensation and benefits practice at BDO. “Our analysis showed us that larger performance-based awards explained the positive compensation change observed in the year-over-year comparison for top performers. However, we also noticed that some of these top performers did decrease salaries, short-term and stock-based incentives. This certainly dampened the magnitude of pay changes for some in the top performing group.”

Similarly, he added, the study found instances where salary increases, larger bonuses, options and stock grants among some of the poorer performing companies cushioned the magnitude of the decline in pay from the prior year.”

Observed Conover, Undoubtedly, 2009 was certainly one of the most challenging years on record in terms of business conditions and the compensation decision-making associated with them. While not the case in every situation, it appears that pay and performance were still connected. As we’ve noted, groups on the margins may have proved contrary to the expectation that positive shareholder returns equal pay increases and vice versa. However, of the top 25 performing companies in each city—the median company increased shareholder returns by 98 percent and increased pay by 6 percent, compared to the bottom 25 performing companies who decreased shareholder returns by 11 percent and decreased compensation by 9 percent.

Other Findings

Additional findings of the 2010 BDO Compensation Trends by City Study reveal that:

San Francisco companies were most stable in terms of shareholder returns, but CEO pay declined. San Francisco was the only city whose poor performing companies still saw a median increase in total shareholder returns (4 percent). It was also the only city whose top performing companies saw a decrease in compensation at a median value of -14 percent, even though San Francisco enjoyed the second highest total shareholder return of any city, at 155 percent. Surprisingly, while CEOs at top performing companies in San Francisco took the 14 percent pay cut, those at the lower performing companies only took a 9 percent pay cut.

New York City shareholder returns reached highest highs and lowest lows. High performing companies in New York City saw a 243 percent shareholder return over the past year; nearly 100 percent more than any other top performing city, with San Francisco and Houston coming in second and third with total shareholder returns of 155 percent and 152 percent respectively. Poor performing companies in New York were at the other extreme, with an average total shareholder return of -27 percent. Other low-ranking cities included Houston, which saw a -19 percent total shareholder return, followed by -13 percent in both Dallas and Boston.

Atlanta had the most volatile CEO compensation. While New York companies had extreme shareholder returns, Atlanta’s CEOs had the most to lose when it came to compensation. This city had the highest compensation increase for top performing companies at 54 percent, and the lowest compensation decrease for poor performing companies at -25 percent.

Stephen Miller is an online editor/manager for SHRM.

Related Article:

10 Executive Comp Issues for Aligning Pay Strategy, SHRM Online Compensation Discipline, July 2010

Pay-for-Performance Plans Would Increase Productivity, Employees Say, SHRM Online Compensation Discipline, August 2010

Quick Links:

SHRM Online Compensation Discipline

SHRM Salary Survey Directory

SHRM Compensation Data Center

SHRM Metro Economic Outlook reports

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