The Advisors' Blog

In 2022, more than 70% of S&P 1500 CEOs achieved target or above-target payouts for annual incentives, according to a new analysis from ISS Corporate Solutions. This trend has held steady for half a decade – with more than half of CEOs achieving payouts at or above target in two consecutive years during that period. Here are other key findings from ICS’s announcement:

– Company size significantly impacted the value of payouts, with S&P 500 companies reporting a median of $2.3 million in incentive payouts last year, compared with $925,000 for those in the S&P 600. Despite the difference in absolute dollars, however, each S&P 1500 market cap grouping has exhibited similar payout growth, with median payouts growing 19 percent since 2018.

– Over 90 percent of S&P 1500 companies CEOs with an annual incentive award were issued a payout of at least threshold – the minimum payout that can be achieved – during the study period, save for 2020 during the pandemic.

– A near 30-point spread in payouts exists between the industry segments with the highest and lowest payouts. In 2022, only 57 percent of CEOs in the Automobiles & Components industry achieved at or above target payouts, while 85 percent of chief executives in the Financial Services industry achieved that feat.

Item 402 of Regulation S-K requires companies to discuss how difficult or how likely it will be for the company to achieve target performance only if the target levels aren’t disclosed. Nevertheless, many companies indicate in their CD&A that target goals are intended to be “rigorous.” ICS questions whether this terminology is accurate when targets are consistently achieved – and says that the “best practice” payout range is 50-60%.

This analysis is a good reminder to choose your words carefully. But it also raises questions about what constitutes “rigor.” When it comes to forecasting year-over-year growth or performance improvements, it is possible that the targets are challenging even if they tend to be achievable. Moreover, CD&As often indicate a philosophy of attracting & retaining executives while also paying for performance. I’m curious whether any of you have thoughts on the best practice payout range and the rationale behind it. If you step back and look at the big-picture goal of motivating executives to consistently deliver strong performance, and consider the “Type A” personalities involved, I’m not sure that orchestrating below-target payouts will do the trick.

– Liz Dunshee