A recent study from The Conference Board, Gallagher & MyLogIQ shows that full-value stock awards represented almost half of total CEO pay last year – compared to 32% in 2010. That’s not too surprising in light of the market highs we experienced – Broc predicts that everyone will leap back into stock options in a bear market. Here’s more detail from the study:
– Companies continue the trend towards granting two or more types of long-term incentive plans (LTIs): All three major LTI vehicles (appreciation awards, time-based awards, and performance-based awards) have increased in prevalence from 2016 to 2017. There has been a slight uptick in appreciation award usage from 2016 to 2017, with prevalence increasing slightly to 46 percent in 2017.
– Both time & performance-based awards are trending: Time-based awards exploded in 2017, increasing in prevalence to 74 percent after falling from 66 percent in 2014 to 64 percent in 2016. In the same period, the use of performance-based awards, mostly performance shares, rose from 64 percent in 2014 to 77 percent in 2016, and have again grown in usage in 2017 to 80 percent. This continues the impetus of companies to demonstrate to their investors that longer-term incentives are more focused on strict performance measurement. Stock options have come under fire recently, with many commentators viewing performance awards that measure achievement over three years as midterm incentives. Stock options vesting over three to five years, and retained beyond that before exercise in many cases, are more often viewed as longer term. In addition, with retention clauses being added to many different types of equity awards—restricted stock, in particular—these are also viewed as longer term.
– Contrary to popular belief, CEO pay at larger companies is stable or even declining, while smaller firms are playing catch-up with double-digit raises for their chief executives: Companies with revenues less than $100 million saw increases for their CEOs at more than 20.5 percent, while CEOs in the next bracket up, $100 million to $999 million, had increases of 14.4 percent. However, CEOs in the largest companies ($25-49.9 billion and $50 billion plus) received, respectively, a decrease in pay (-7 percent) and a relatively modest raise (1.4 percent). Among financial services firms, several asset value brackets saw total compensation declines, and there was no real pattern to the changes in contrast to the analysis by revenue. In the lowest asset value bracket (less than $500 million) total compensation fell by more than 8 percent, while in the next bracket up ($500-$999 million) total compensation increased by more than 80 percent.
Relative total shareholder return is still the most popular performance metric for long-term awards. This Exequity memo says it’s used in way or another by more than half of companies. In this article, Willis Towers Watson benchmarks specific “Relative TSR” provisions – so you can see how your plan compares. Here are 10 takeaways (check out the article for visuals & more detail):
1. Threshold performance: most commonly set at the 25th percentile – but 30% of companies use a higher threshold
2. Threshold payout: most commonly set at 50% of target
3. Target performance levels & vesting: almost always set at 50th percentile performance with target vesting at 100%
4. Maximum performance level: most commonly the 75th percentile – but there are plenty of plans above that
5. Maximum vesting: two-thirds of companies use 200% and a quarter of companies use 150%
6. Impact of absolute TSR: 25% of companies cap vesting if absolute TSR is negative or below target, even if relative performance is above target
7. Overall payout caps: used by only 4% of surveyed companies
8. Stock price averaging mechanism: used by 85% of plans – typically 20-30 trading days
9. Size of peer group: typically 10-25 companies
10. Dividend equivalents: more than half of surveyed companies offer dividend protection during the performance period – paid at the end based on vesting outcome
If your company conducts “accelerated share repurchases” (ASRs), you should (tactfully) share the findings of this study with your compensation committee. An ASR is a privately-negotiated alternative to a traditional open-market buyback program, and can be completed more quickly. But ASRs are leading to some questionable bonus payouts:
– 29% of companies conducting ASRs would’ve missed EPS targets if they hadn’t conducted the buybacks – compared to 14% of companies that conducted regular open-market repurchases
– CEOs of companies conducting ASRs were more likely to have EPS-contingent bonuses
– When calculating payouts, compensation committees adjusted EPS for the ASR at only 3 of the 239 companies
This Cooley blog gives more detail about the study and why compensation committees should carefully consider the timing and impact of any accelerated share repurchase.
As always, this is the next step for ISS as it formulates its 2019 voting policies. Comments are due by November 1st. Final policy changes are expected in mid-November…
How to Order a Hard-Copy: Remember that a hard copy of the 2019 Treatise is not part of a CompensationStandards.com membership so it must be purchased separately. Act now as this will ensure delivery of this 1620-page comprehensive Treatise soon. Here’s the “Detailed Table of Contents” listing the topics so you can get a sense of the Treatise’s practical nature. Order Now.
– Average ratio for S&P 500 companies was 160:1
– For the Fortune 1000, it was 158:1
– For the Russell 3000, it was 71:1
– Median employee pay was $69,000 for S&P500 versus $108,000 for the tech industry
– Highest ratios were in retail, consumer discretionary and consumer staples and materials
– Lowest ratios were in financials, healthcare and utilities
– 19% of the Russell 3000 provided some sort of supplemental pay disclosure such as adjusted workforce, full-time only employees used to find median or adjusted CEO pay due to one-time awards
– Some companies noted a low pay ratio this year due to caveats to prepare for higher ratios in the future
Steven’s book (“The CEO Pay Machine“) is an easy-to-read & entertaining dissection of how we got to where we are – and how we can fix it. His book is laden with stories that really “tell it like it is.” Please check it out & tell others that can help make a difference…
With a season of pay ratio disclosures in the books, the debate whether the ratio should be calculated continues. Here’s an excerpt from this ValueEdge blog:
As the dawn follows the night, so must the “investors don’t know what they want” be followed by the “it’s too expensive” argument. Others have suggested pay ratio disclosure sheds a light on income inequality. Yes, but existing disclosure of executive pay already shows how much executives are paid. If the goal is to highlight income inequality, couldn’t we do it in a less costly way? For example, we could disclose the ratio of a CEO’s pay to the median salary of a worker in the company’s industry. The Bureau of Labor Statistics provides plenty of industry data for comparison.
If companies don’t know what the median pay is for their employees, we suggest that what is expensive is their ignorance. They should want to know. They should have the capacity to know.
We find it material. We believe journalists, securities analysts, board comp committees, and scholars will as well. We look forward to developing many years of pay ratio data to help us understand better the ROI of the management and boards of our portfolio companies. In the meantime, we suggest that firms like Pearl Meyer spend more time telling clients what they need to hear instead of what they want to hear and leaving the determination of what shareholders need to know to shareholders themselves.
At our recent “15th Annual Proxy Disclosure/Executive Compensation Conference” there was a lot of discussion about how to prepare for Year 2 of pay ratio. The biggest decisions are whether you’ll use the same median employee – some analysis is required to determine whether there’s been a material change to your workforce – and whether to elaborate on the details of that decision-making process and year-over-year changes to the ratio. This Willis Towers Watson memo explores the factors you need to consider for these issues. Here’s an excerpt:
You may be required to identify a new median employee if there were changes to the employee population or the median employee’s compensation arrangements or circumstances (e.g. if they left the company) – and you’ll need to determine whether to disclose recalculations, changes to circumstances and/or the methodology to identify a “substantially similar” Year 2 median employee. In addition, your disclosure will be different if you change your approach to including personal and non-discriminatory benefits in the “total pay” calculation.
The application of statistics to pay demographics may help determine whether organizations must use the same median employee for Year 2, regardless of whether they used statistical sampling in Year 1. Some companies may be disappointed to discover they can’t use the same employee they selected in Year 1, while others will discover that differences in that employee’s Year 2 Summary Compensation Table pay will influence the pay ratio.