The Advisors' Blog

Last fall, Liz shared that more than 70% of S&P 1500 CEOs achieved target or above-target payouts for annual incentives in 2022, according to an analysis from ISS-Corporate. In that analysis, ICS questioned whether terminology commonly used by companies in CD&A — stating that target goals are intended to be “rigorous” — is accurate when targets are consistently achieved. The report suggested a “best practice” payout range is 50-60%.

This recent report by Compensation Advisory Partners, which analyzed annual incentive plan payouts over the past ten years of 120 large U.S. public companies with a median revenue of $43 billion, further supports this 70% statistic.

Based on our analysis of actual incentive payouts over the past ten years, the degree of difficulty, or “stretch”, embedded in annual performance goals translates to:
– A 95 percent chance of achieving at least Threshold performance
– A 70 percent chance of achieving at least Target performance
– A 5 percent chance of achieving Maximum performance

Not surprisingly, 2020 and 2021 were outliers:

In most of the years reviewed in our study, between 60 percent and 80 percent of companies paid bonuses at target or above. There were two exceptions: 2020, when only 55 percent of companies paid bonuses at target or above, and 2021, when 89 percent of companies paid bonuses at target or above.

In 2020, bonuses were generally down due to the unanticipated impact of the COVID-19 pandemic on financial results, while in 2021 bonuses increased due to a faster than expected rebound for most companies. In 2022, we saw a return to more typical payout distributions with 65 percent of companies paying bonuses at target or above.

With the macroeconomic environment still highly uncertain, the report notes that “companies can use design strategies to help reduce volatility in their plan payouts, including setting wider ranges around target to recognize the challenges of setting performance goals in an uncertain environment, using non-financial goals to tie annual incentive payouts to other markers of company progress, and adding relative measures, which will allow for relevant comparisons even if the overall market is affected by macroeconomic challenges.” On the use of non-financial goals, some had speculated that the Dodd-Frank clawback rules may also cause companies to include more strategic or operational goals in their plans. Whatever the reason, an increasing number of companies in this study are taking that approach (separate from ESG goals):

57 percent of companies in our current study use strategic or nonfinancial goals, an increase from 38 percent in 2020. These metrics incentivize behaviors that contribute to long-term success but may not be captured by short-term financial performance results. Specific strategic or nonfinancial metrics vary by industry and company – for example, pharmaceutical companies often use pipeline metrics and oil and gas companies often use safety and environmental metrics.

– Meredith Ervine