Shareholder Return is Rarely the Performance Goal Driving Their Compensation
According to research on executive compensation released today by The Conference Board, not only have the CEOs of Gamco Investors, CBS Corp, Viacom, Regeneron Pharmaceuticals, Walt Disney, Yahoo! and Discovery Communications featured on the list of the 25 highest paid executives in America every year since 2012, but their pay has almost always been driven by factors other than the price of their company shares.
A collaboration between The Conference Board, Arthur J. Gallagher & Co. and MylogIQ, CEO and Executive Compensation Practices: 2016 Edition documents trends and developments in senior management compensation at companies that issue equity securities registered with the U.S. Securities and Exchange Commission (SEC) and were included in the Russell 3000 index as of May 2016.
“In the last few years, companies have been responding to public scrutiny over pay-for-performance and made significant adjustments to their compensation policies—curbing base salaries and annual bonuses, introducing retention requirements on equity awards, and shifting from single metric to blended-metric incentive plans,” said Matteo Tonello, Managing Director of Corporate Leadership research at The Conference Board and co-author of the report. “And yet we found that pay and performance alignment, at least where performance is measured in terms of total shareholder return (TSR), continues to elude some industries’ chief executives.” Their top-level compensation is due to performance metrics other than TSR. For example, at asset management public company GAMCO, Mario Gabelli receives fees related to the total assets that his investment company manages, not only the returns generated by those invested assets. At media companies Viacom and CBS, the performance targets of choice are operating income and free cash flow, both for annual and long-term incentives; moreover, the compensation required to retain a CEO is inevitably distorted by the generous compensation offered by those companies to the artists and other media talent needed to appeal to wide audiences. Therefore, at least for these individuals, an analysis of TSR performance is only going to tell some of the story.
“One of the pleasures of working with and writing about the data in this survey is the time perspective. I can think of no other survey that does not just look at the last two years of figures,” said Paul Hodgson, partner of governance research firm BHJ Partners and co-author of the study. “Having five years of data allows you to really understand the trends in executive pay over time, which is so much more enlightening than a simple ‘what happened last year’ approach. Things change so fast in executive pay that making claims based on a single year change often opens you up to having to make a counter all the following years.”
“This report is a comprehensive review of all companies in the Russell 3000 over the past five years and is a remarkable resource for those interested in executive compensation,” added James Reda, Managing Director, Executive Compensation Consulting at Arthur J. Gallagher & Co., also a co-author. “The pay trends are stratified by industry and company size and provide insight into what is really happening with senior executive compensation in the U.S.”
Other findings highlighted in CEO and Executive Compensation Practices: 2016 Edition include:
- CEOs of smaller companies benefited from the highest total pay growth in 2015, but the compensation gap between them and their colleagues in the S&P 500 remains wide. Excluding the effects of pensions, the increase in median total compensation for CEOs in the S&P 500 was 2.9 percent, contributing to a six-year rise (from 2010) of 22.25 percent. The equivalent figures for the Russell 3000 were 4.2 percent and 54.7 percent respectively. In fact, in the smallest company bracket by revenue, under US$100 million, the increase in median total pay was 37 percent, just between 2014 and 2015 levels. In contrast, the CEOs of the largest companies (US$50 billion and over) received a rise in median pay of 10.8 percent, while smaller organizations saw their median compensation shrink even when excluding the effects of pensions.
- Smaller increases in total CEO compensation documented for some industries (including energy, utilities, and telecommunication services) reflect the lackluster performance caused by the slump in commodity prices, new regulatory restraints, and market saturation. According to the business sector analysis, and again excluding the effect of pension change, CEOs in telecommunications, utilities, industrials, and energy saw median total compensation fall. For energy firm CEOs, the decrease was as large as 17.7 percent. In contrast, CEOs of companies in the consumer discretionary (such as entertainment and travel), consumer staples, and health care sectors all experienced double digit increases, with the highest going to consumer staples CEOs at 28 percent. On the other hand, no industry reported a negative six-year change, with health care CEOs experiencing median growth in total compensation between 2010 and 2015 of 94 percent, from US$1,817,000 to US$3,525,000.
- As companies continue to strive to achieve pay-for-performance, a rise in the value of stock awards drives the bulk of total CEO compensation increases. Stock awards have taken up the slack of virtually every other component of pay. S&P 500 CEOs receive 47 percent of their total pay in the form of stock awards, up from a third in 2010, while in the Russell 3000 it has risen from less than a quarter of total pay to more than a third. More specifically, in 2015 the value of stock awards grew by over 23 percent at the median for CEOs in the Russell 3000, and by 13.7 percent for CEOs in the S&P 500. Over the last six years, the growth in the value of median stock awards for the Russell 3000 has been impressive at 291.4 percent (and as high as 358.3 percent for small companies with asset values between US$500 and US$999 million). In the first quarter of 2015, when decisions about most stock awards are made, awarded stocks in both the S&P 500 and the Russell 3000 were higher than at the beginning of 2014. It remains to be seen whether the volatility that these equity indices registered in 2015 will curb the rise of stock award value in 2016.
- With an inflation rate of less than one percent for both 2014 and 2015, market pin the S&P 500 and the Russell 3000, respectively. Double-digit total compressure and the looming to 2015, base salary rose four and 4.7 percent for CEOs application of the new SEC pay ratio rules explain the moderate rises in CEO base salary. Comparedensation increases for CEOs of consumer staples companies were not cause dby any increase in base salary, since median salary fell by two percent in that industry. The base salary of energy CEOs showed no increase at all at the median. But for most others, base salary rose by between two percent (utilities and materials) and 6.8 percent (information technology (IT)). Similar disparities can be found when companies are broken down by revenue and asset size. CEOs at the largest companies saw either no increase in median salary or, in the case of companies with annual revenue between US$25 and US$49.9 billion, a decline in median salary by 8 percent. In contrast, CEOs of companies with annual revenue of less than US$100 million reported a median salary increase of 9.4 percent, compared to a 7.5 percent increase for companies with asset values of US$500 million or less.
- Stock options have been losing importance as a compensation incentive in large companies, where scrutiny on share value manipulation and other unintended behavioral effects has been felt the most. However, when smaller organizations are analyzed, the move away from stock options is not as significant as is commonly claimed. Options as a percent of total CEO pay fell from around 18 percent to 15 percent in the S&P 500. In contrast, CEOs in the Russell 3000 have been steadily receiving around 15 percent of their pay in stock options in each of the last six years, with little or no change in the percentage.
- Pension value changes and the increase in non-qualified deferred compensation (NQDC) have fallen back to normal levels following the absorption of the major actuarial valuation adjustments that occurred in 2014. In the S&P 500, for example, the amount went from less than three percent of pay in 2013 to almost eight percent in 2014, before halving to four percent in 2015. Given the lack of involvement of boards and compensation committees in such volatility, it is hardly surprising that most surveys are careful to give figures that both exclude and include this element of pay. Across industries and company size groups, the change in pension value and NQDC was negative, both between 2014 and 2015 and over the entire six-year period.
- The gain in strength of the US dollar has slowed the operational performance of many multinational companies, causing a sharp year-on-year decrease in the median annual bonuses granted to CEOs in both the Russell 3000 and the S&P 500. In fact, in the S&P 500, median 2015 bonuses are lower than they were six years ago (when they stood close to US$2 million), though similar in level to the median bonus awarded in 2012 and 2011 (around US$1,850,000). As with other compensation elements, median bonuses for CEOs of the smallest companies reverse the general trend. Median bonuses for CEOs of companies with annual revenue of less than US$100 million increased by three percent; for companies with asset values of less than US$500 million, this increase was seven percent. In contrast, CEOs of companies with an asset value of more than US$100 billion saw median bonus value fall by almost a fifth.
- In 2015, for the first time in years, the annual growth in percentage points of total NEO compensation exceeded that of CEOs—a sign that companies may be concerned about talent retention at the top in a tightening job market. While growth of compensation for NEOs exceeded that of CEOs between 2014 and 2015, growth for NEO compensation in the long-term lags that of CEOs. NEO pay rose between 2010–2015 (32 percent and 15.8 percent in the Russell 3000 and S&P 500 respectively), but CEO pay rose more over this period (55 percent and 22 percent for each index). The latest year of slower pay growth may also reflect concerns that differentials are widening too far between CEOs and NEOs. In 2015, median total compensation for NEOs (other than the CEO) was US$1,439,000 in the Russell 3000 and US$3,563,000 in the S&P 500.
- The increasing attention paid by investors and other stakeholders to sustainability and long-termism is prompting companies to add non-financial targets to their incentive plans, which seldom still rely on a single metric of performance. The number of performance measures included in an incentive plan has steadily increased over the past five years, expanding to a series of qualitative aspects of firm performance—ranging from customer satisfaction to the implementation of safety standards and from employee turnover rates to environmental impact measures. When non-financial measures are included in the target count, more than a quarter of firms use more than six performance metrics in their STI plans. Excluding them brings that proportion down to one percent. Without non-financial measures, a third of companies have between two and three metrics for their annual plans. The volume of companies using only a single metric continues to shrink quite rapidly; in STIs, it is down from 16 percent to 14 percent from 2014 to 2015, up from almost a third of the examined 2010 sample. For LTIs, companies using a single metric dropped from 41 percent in 2010 to 19 percent in 2015.
CEO and Executive Compensation: 2016 Edition is available for download here. A fee may apply for non-members of The Conference Board.
About The Conference Board
The Conference Board is a global, independent business membership and research association working in the public interest. Our mission is unique: To provide the world’s leading organizations with the practical knowledge they need to improve their performance and better serve society. The Conference Board is a non-advocacy, not-for-profit entity holding 501(c)(3) tax-exempt status in the United States.
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About Arthur J. Gallagher & Co.
Arthur J. Gallagher & Co., an international insurance brokerage and risk management services firm, is headquartered in Itasca, Illinois, has operations in 33 countries and offers client-service capabilities in more than 150 countries around the world through a network of correspondent brokers and consultants.
The Executive Compensation team within Arthur J. Gallagher & Co.’s Human Resources & Compensation Consulting Practice works with public and private companies to create competitive executive compensation programs that attract and motivate key talent. Our nationally recognized leadership team has decades of experience working with compensation committees and company management on executive compensation to expertly address topics unique to this space, such as change-in-control 280G issues, compensation data resources, equity valuation techniques, incentive design benchmarking and ISS analysis.
MylogIQ takes SEC filings and turns them into actionable insights. MyLogIQ offers the largest repository of 360° intelligent data on public companies, reporting, and regulatory trends. The company started innovating with Big-Data and analytics more than a decade ago with a single focus: extracting intelligence from public company disclosures to the SEC and company websites. Users can subscribe to a range of intelligent databases including: SEC Disclosure Research and Benchmarking; SEC Comments and company responses; Audit Fees and SOX Analysis; Corporate Governance Analysis; Executive and Director Compensation Analysis; Financial Analysis; XBRL Liability Analysis; Ownership and Activist Investors. MyLogIQ solutions are used by public companies, auditors, legal counsel, academia, and regulatory bodies.
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