The Advisors' Blog

– Broc Romanek, CompensationStandards.com

For the vast majority of S&P 1500 companies, there is a major disconnect between operating performance, shareholder value and incentive plans for executives – among the things noted in this new IRRC study Institute (also see this WSJ article & other piece). As noted in this blog from Jon Lukomnik of the IRRC Institute:

– Economic performance explains only 12% of variance in CEO pay. More than 60% is explained by company size, industry, and existing company pay policy. None of those are performance driven.
– Some 75% of companies have no balance sheet or capital efficiency metrics in their disclosed performance measurement and long-term incentive plan design.
– Only 17% of companies specifically disclose return on invested capital or economic profit as a long-term performance measure for long-term executive compensation.
– Some 47% of S&P 1500 companies over the last five years (2008 – 2012) did not generate a positive cumulative economic profit or return on invested capital greater than their cost of capital.
– More than 85% of the S&P 1500 have no disclosed line of sight process metrics aligned to future value such as innovation and growth drivers.
– Only 10% of all long-term incentives have a disclosed longest performance period for named officers of greater than three years.
– Nearly 25% of companies have no long-term performance based awards at all, relying instead stock options and time-based restricted stock in their long-term compensation plans.