The Advisors' Blog

Do the executive compensation programs of companies with TSRs that have consistently surpassed the broader equities market have any consistent, differentiating aspects? That’s the question WTW set out to answer in a recent look at how enduring high performers (defined as S&P 500 companies with TSR that outperformed the overall S&P 500 about 90% of the time in the past 10 years) pay their executives. And the answer is yes. This article says these companies “follow a path less traveled.” Here are some specifics:

EHPs leverage incentive compensation to provide for greater risk and reward potential via a greater emphasis on performance-based pay and more upside and downside potential in incentive payout curves. In EHPs, CEOs’ target total direct compensation comprises a higher portion in short-term incentives (STI) plus long-term incentives (LTI) than in the broader market

EHPs provide more leveraged incentive payout opportunities. (E.g., the average STI maximum payout as a percentage of target award is 200% in the broad market, whereas the average maximum payout among EHPs is 215%. At the bottom of payout curves, the broad-market STI threshold payout is, on average, 22% of target while the average EHP STI threshold payout is just 13%.)

EHPs seek focus by using fewer performance metrics and tend to encourage a longer-term perspective through longer LTI vesting. Whereas the number of STI metrics in the broad market is typically four or more, EHPs tend to use three or fewer STI metrics. Likewise, nearly half of companies in the broad market use three or more metrics for long-term performance plans (LTPP), while nearly half of EHPs use two metrics and about one-quarter use just one metric. EHPs also maintain longer LTI vesting periods.

For LTIs, EHPs apply greater emphasis on stock price appreciation by being more likely to use stock options. While the prevalence of time-vested restricted shares/units is lower among EHPs (68%) than other companies (75%), more EHPs (53%) use stock options than other companies (40%). We also observed that, while both EHPs and other companies typically grant stock options with a 10-year term, EHPs are more likely to use a seven-year term.

– Meredith Ervine