CEO Pay for Performance Expected to Rise

By Eve Tahmincioglu

Early proxy statement filings are providing a picture of CEO compensation trends that are strongly tied to performance, according to a new report.

In 2016, median CEO pay climbed to 5.5% from the previous year mainly as a result of increases in yearly incentive payouts and long-term incentives, according to a compensation report by Compensation Advisory Partners, known as CAP.

“The alignment between pay and performance will continue to be an area of interest,” explains Lauren Peek, Principal with CAP. “The early filers demonstrated an even stronger link between company performance and bonus payouts than in prior years.”

“Given the focus on goal-setting by both management and Compensation Committees,” she adds, “we would expect annual incentive payouts for calendar year-end companies to continue to demonstrate a strong pay and performance linkage based on company financial and operational results.”

Here are additional highlights from the findings:

  • Performance: 2016 performance (based on Revenue growth, Pre-tax Income growth, EPS growth and 1-year TSR) was generally flat year over year.
  • Annual Incentive Payout: Overall, median 2016 annual incentive payout was 104% of target which was consistent with 2015 results.
  • Annual Incentive Plan Design: Profit-based growth, Revenue growth and Cash Flow growth are the most common measures used in the annual incentive plan. Companies typically use 2 – 4 metrics to ensure executives are focused on overall company performance.
  • Long-Term Incentive (LTI) Design: Performance-based awards are the most prevalent LTI vehicle although stock options and time-based restricted stock are also commonly used but to a lesser extent. Most companies use relative TSR as an LTI metric although we expect its use to plateau as proxy advisory firms like ISS begin to use financial performance in their pay-for-performance assessment.

CAP reviewed executive compensation pay levels and trends at 50 companies (Early Filers) that filed their most recent proxy statement between November 2016 and January 2017 (fiscal year ends from July 2016 to October 2016; 35 companies have September 30 fiscal year ends). Industry sectors reviewed include: Consumer Discretionary, Consumer Staples, Financials, Health Care, Industrials, Information Technology and Materials.