December 10, 2008
Survey: NYSE vs. Nasdaq
– Jack Dolmat-Connell, CEO, DolmatConnell & Partners
We recently conducted a study on trends in executive compensation and long-term incentives (LTI) for 2008 in both the top 100 NYSE and Nasdaq firms. Despite fierce media, investor, and government claims to the contrary, the study conclusively finds that executive pay is related to firm performance. Both sets of firms have strong links between company performance and short-term and long-term incentive payouts, especially when long-term incentives are considered in a new light – that of realized and unrealized value.
The study looked at top 20 performing and bottom 20 performing companies in each index. It found that the elements of executive compensation that are the most correlated to performance (actual bonus paid, bonus payouts as a percentage of target, and the value of realized and unrealized equity), top performing CEOs far outpace their lower performing peers, both in absolute dollars and change from the prior year.
Actual total direct compensation at top performing companies for the CEO saw greater increases (up 16%) over the last year than bottom performing CEOs, who saw either little growth or slight reductions in total pay (between +3% and -3%).
More importantly, realized and unrealized equity compensation was vastly different between top and bottom performers, both in absolute amounts and year-over-year change. For example, unrealized equity compensation was at $63.4M in the NYSE top 20, up 77% from the prior year, and only $18.5M in the bottom 20, down 34.1% from the prior year. This is truly where pay for performance can be seen.
The study also revealed a direct relationship between real ownership (shares owned outright) and company performance in both indices. Top performing NYSE CEOs hold approximately eight times as much equity than their bottom performing counterparts, and top performing Nasdaq CEOs hold approximately ten times as much equity as bottom performing CEOs. Such high levels of ownership show a symbiotic relationship between ownership and performance, and give executives “skin in the game” to align their own personal wealth accumulation with the financial success of the company.