The Advisors' Blog

According to a new study by our firm of Fortune Magazine’s Top 300 publicly-traded companies, a majority of 2007 proxy disclosures on annual and long-term incentive plans were inconsistent and incomplete when disclosing incentive performance metrics.

Surprisingly, many top U.S. publicly traded companies failed to disclose or explain their incentive performance metrics. Our study of 2007 proxies of nearly 300 companies revealed only 16% (46) of the companies provided complete metric and payout information for short-term incentive plans (STIP), while 19% did not provide any STIP metric values. 65% (190) of the companies had long-term incentive plans (LTIP), and of those, only 46% (88) included a reasonably complete set of metric values and corresponding payout percentages.

– TSR and EPS were the two most commonly used long-term incentive measures
– Income/profit measures and EPS were the most commonly used short-term incentive measures
– Most companies with long-term incentive plans had either one (60%) or two (32%) performance measures
– Short-term incentive plans usually included multiple performance measures
Relative performance measures to their peer groups were rarely found in short-term incentive plans (8%)
– 43% of companies with a long-term incentive plan used a relative measure
– 50% of long-term incentive plans with a relative performance measure used a total shareholder return measure with the target set at the 50th percentile of a peer group
– In all, two-thirds of companies with relative performance measures used total shareholder return
– For companies using the 50th percentile as target for a relative performance measure, over half (57%) set threshold performance at the 25th percentile
– For short- and long-term incentive plans, threshold payouts were frequently set at 0%, 25% or 50% percentile of target
– Maximum payouts were usually capped at 150% or 200% of target bonus

– Jack Moran