June 28, 2017
Performance Targets: Too Easy?
– Liz Dunshee
CEO pay is increasingly tied to performance – but while cash pay is at an all-time low (according to this recent Korn Ferry study) – overall pay is continuing to climb. This leaves key institutional investors wondering whether the performance bar is too low. Here’s a teaser from this WSJ article:
For two-thirds of S&P 500 companies, the overall pay CEOs received over the past three years proved higher than initial targets, according to an ISS analysis. That is typically because performance triggers raised the number of shares CEOs received, or stock gains lifted the value of the original grant. On average, compensation was 16% higher than the target.
The values companies disclose for CEO equity awards also show that about one-third of CEOs start the fiscal year expecting to beat the performance targets that determine the size of those stock grants, ISS said.
Boards must juggle a range of factors in setting performance targets. Investors and proxy advisers have their preferred measures, and consultants recommend targets that are challenging but not impossible. They can evaluate how well they have chosen by considering the market’s reaction, said Ira Kay, managing partner at consultancy Pay Governance. “If we beat it and our stock goes down, it was probably not such a hard goal,” Mr. Kay said.
For more thoughts, check out this blog by Cydney Posner & my recent blog on the growing unrest over LTIPs.