CEO Pay: A Middle Market Perspective

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    01-Nov-2014
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CEO Pay: A Middle Market Perspective, presented to the Minneapolis-St. Paul NASPP Chapter on March 27, 2014. Executive compensation has continued to evolve in recent years. Companies are increasingly required to balance the need for competitive pay with the need to respond to increased scrutiny, particularly with regard to the relationship between pay and performance. To provide some insight and perspective, Buck Consultants has recently completed a study of executive compensation practices and trends in the middle market. In this study, Buck analyzed total direct compensation for Chief Executive Officers in companies listed on the S&P 400 MidCap Index. In this presentation, we will discuss our findings with regard to both current practices and trends for CEO pay in these Mid-Cap companies. Because long-term incentives typically comprised the largest portion of executive compensation, our study focused on prevalence, mix, usage and design of equity vehicles. Finally, we will look at governance issues, including corporate governance concerns and the degree of alignment between pay and performance.

Transcript of CEO Pay: A Middle Market Perspective

  • 1. A Middle Market Perspective Executive Compensation March 27, 2014
  • 2. Agenda Today, we will: - Take a look back o Perspectives on 2013 o Results of the S&P Mid-Cap Index Study - Take a look forward o 2014 issues and emerging trends 2 MSP NASPP: CEO Pay
  • 3. What did we see in 2013 Simply putmore of the same drifting with a purpose Pay less while paying more Play for performance Decisions driven by disclosure Optics continue to be a major feature in plan design Continued pressure on problematic practices Continued oversight by outside advisors, e.g., ISS, Glass Lewis 3 MSP NASPP: CEO Pay
  • 4. S&P 400 Midcap Index This study covers CEOs in 321 non-financial companies within the S&P Midcap 400 Index This database is updated twice a year, in June and in December As a result, data can span fiscal years based on filing dates and when the database was last updated 4 MSP NASPP: CEO Pay
  • 5. Industry Breakout 5 MSP NASPP: CEO Pay This Index provides a good cross section of industries Consumer Discretionary 21% Consumer Staples 4% Energy 7% Healthcare 12%Industrials 21% Information Technology 19% Materials 8% Telecommunication Services 1% Utilites 7% Industry Distribution
  • 6. Revenue Breakout 6 MSP NASPP: CEO Pay Also provides a good representation of Middle Market Less $1B, 17% $1B- $5B, 67% $5B - $10B, 13% "10B +, 3% Revenue Breakout
  • 7. Target Total Direct Compensation 7 MSP NASPP: CEO Pay Targeted TDC increased 12% from 2011/2012 to 2012/2013, slightly above the annual 9% movement we saw last year 7 Target Total Direct Compensation = Base Salary + Target Cash Short-Term Incentive + Grant Date Value of Stock Options (as reported by Company) + Grant Date Value of Restricted Shares + Target Value of Performance Share Grants. $2,642,565 $3,123,328 $3,460,775 $4,175,268 $4,547,221 $5,110,040 $5,654,551 $6,042,506 $7,069,947 2010/2011 2011/2012 2012/2013 Target Total Direct Compensation 25th %ile 50th %ile 75th %ile
  • 8. 8 MSP NASPP: CEO Pay Target Total Direct Compensation $6,568,500 $5,531,253 $4,787,403 $4,704,182 $4,614,921 $4,271,669 $3,508,264 $2,817,634 Construction Wholesale/Retail Services Manufacturing Communications Mining Transportation Utilities Last Fiscal Year Target Total Direct Compensation By Industry
  • 9. 9 MSP NASPP: CEO Pay Target Total Direct Compensation -7% 12% 13% 10% 6% 13% 21% 14% Year over Year Change in Target Total Direct Compensation By Industry Median
  • 10. Base Salary 10 MSP NASPP: CEO Pay $634,729 $673,308 $700,000 $806,540 $835,000 $840,000 $969,755 $1,000,000 $1,000,000 2010/2011 2011/2012 2012/2013 CEO Base Salaries 25th %ile 50th %ile 75th %ile CEO base salaries were relatively flat compared to last year, following a 3.5% increase over the prior year
  • 11. Short-Term Incentive Plans (STIP) 11 MSP NASPP: CEO Pay $660,000 $723,000 $678,330 $846,260 $903,455 $900,800 $1,125,000 $1,230,408 $1,209,500 2010/2011 2011/2012 2012/2013 Short-Term Incentive Plan Targets (Excludes Zeroes) 25th %ile 50th %ile 75th %ile Target STIP values were also relatively flat compared to last year, following a 6.8% increase over the prior year
  • 12. 12 MSP NASPP: CEO Pay Short-Term Incentive Plan Payouts Over 90% of the companies with a formal STIP paid out above target in all three years with payouts relatively flat compared to last year, following a 31% increase over the prior year $579,920 $690,000 $705,729 $837,500 $1,100,000 $1,020,044 $1,313,200 $1,605,294 $1,560,080 2010/2011 2011/2012 2012/2013 Short-Term Incentive Plan Payouts (Excludes Zeroes) 25th %ile 50th %ile 75th %ile
  • 13. Paying for Performance Short Term Year over Year Increase in Total Cash vs. Net Income Growth Alignment 13 MSP NASPP: CEO Pay -43% 6% 43% 3% 4% 4% -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% Bottom Third Middle Third Top Third CEO YoY Total Cash Compensation Change vs YoY Net Income Change % Change in NI % Change in Total Cash The top 1/3 of performers saw the same change in cash as the middle 1/3, which saw nominally more cash than the bottom 1/3
  • 14. 14 MSP NASPP: CEO Pay About 20% utilized some cash payment in the form of a discretionary payment 21% 17% 19% 2010/2011 2011/2012 2012/2013 Prevalence Discretionary Bonus Payments (% of Companies that Awarded a Discretionary Bonus to the CEO) Discretionary Bonus Payments
  • 15. Discretionary Bonus Payments The value of discretionary increases declined by about 12%, following a 15% increase in the prior year 15 MSP NASPP: CEO Pay $212,000 $150,000 $148,350 $430,000 $494,400 $432,800 $750,000 $921,281 $1,000,000 2010/2011 2011/2012 2012/2013 Discretionary Bonus Payments (Excludes Zeroes) 25th %ile 50th %ile 75th %ile
  • 16. 16 MSP NASPP: CEO Pay Pay Mix: Short-Term vs. Long-Term Long-term compensation continues to surpass that of short-term compensation in the CEOs pay mix 16 41% 38% 44% 59% 62% 56% 0% 20% 40% 60% 80% 100% 120% 2010/2011 2011/2012 2012/2013 Pay Mix Short Term Target Comp vs. Long Term Target Comp PAY MIX Long-Term PAY MIX Short-Term
  • 17. 17 MSP NASPP: CEO Pay Long-Term Incentive Grant Values Long-term incentives as a multiple of base salary have increased significantly in year-over-year comparisons 0.00 1.00 2.00 3.00 4.00 5.00 25th Median 75th 1.30 2.40 3.91 1.92 2.90 4.46 2.10 3.14 4.67 Long-Term Incentive Values as Multiple of CEO Base Salary 2010/2011 2011/2012 2012/2013
  • 18. 18 MSP NASPP: CEO Pay Average Equity Grant Makeup Mix Value Equity grants continue to shift away from stock options, with the heaviest weight now on performance-contingent shares 18 42% 37% 33% 27% 32% 30% 31% 33% 26% 32% 37% 41% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2009/2010 2010/2011 2011/2012 2012/2013 Average Equity Grant Makeup Performance-Based Restricted Stock Time-Based Restricted Stock Stock Options
  • 19. 19 MSP NASPP: CEO Pay Equity Grant Vesting
  • 20. 20 MSP NASPP: CEO Pay Equity Grant Vesting 20 0% 10% 20% 30% 40% 50% 60% Immediate 1 2 3 4 5+ 1% 3% 4% 56% 25% 12% Vesting for Service-Based Full Value Awards
  • 21. 21 MSP NASPP: CEO Pay Cash-Based Performance Unit Vesting 21 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 LFY LFY-1 LFY-2 Performance Contingent Awards Performance Period 25th Percentile 50th Percentile 75th Percentile
  • 22. Performance Period for Performance Share Plans The most common performance period is 3 years. Companies with shorter performance periods typically vest over 3 years 22 MSP NASPP: CEO Pay
  • 23. 23 MSP NASPP: CEO Pay Prevalence of LTI Vehicles Fewer companies granting stock options Performance-Based Restricted Stock remained steady while Time- Based Restricted Stock saw a slight gain Cash programs declined slightly 57% 51% 62% 14% 6% 60% 56% 56% 14% 7% 60% 59% 50% 8% 9% 0% 10% 20% 30% 40% 50% 60% 70% PBRS TBRS Stock Options Cash None 3-Year Long-Term Incentive Vehicle Utilization LFY-2 Prevalence LFY-1 Prevalence LFY Prevalence
  • 24. 24 MSP NASPP: CEO Pay Value of Long-Term Incentive Plan Targets Date of Grant values for Last Fiscal Year (LFY) LTIP remained relatively steady after an 11% increase in the prior year $1,542,740 $1,921,173 $1,829,954 $2,660,272 $2,950,520 $2,876,446 $3,835,618 $4,218,631 $4,243,434 $- $500,000 $1,000,000 $1,500,000 $2,000,000 $2,500,000 $3,000,000 $3,500,000 $4,000,000 $4,500,000 LFY-2 LFY-1 LFY Long-Term Incentive Plan Grant Values (excludes zeroes) 25th Percentile 50th Percentile 75th Percentile
  • 25. 25 MSP NASPP: CEO Pay Long-Term Incentive Realizable Values? Companies will continue to refine the message in their CD&A disclosure to help explain equity pay practices to shareholders We are seeing greater use of realizable pay disclosures as a clarifying alternative to grant date LTIP values Demonstrate that the real value of pay opportunities depends on future stock prices and/or achievement of performance goals which may not ultimately be