Blog Article

Why are CEOs getting more cash?

Posted by Irv Becker

Irv Becker

According to the first 50 results from the latest Wall Street Journal/Hay Group survey, CEO compensation at large US corporations rose again in 2014, with median pay up 6.9 percent to $12.2m, vs. a 4.3 percent rise in 2013. The notable trend in these numbers is the increase in cash compensation as a percentage of total compensation. This is in sharp contrast to what we have observed in recent years as long-term incentives have been reflecting an increasingly greater portion of the overall pay package in response to shareholder and board desires for greater alignment with longer-term outcomes of the business.

Limited room for maneuver

The last 5-10 years has seen compensation committees shift variable rewards toward long-term incentives (usually performance-based equity and away from stock options), while salary increases have historically tended to provoke complaints from institutional shareholders. Today, however, big corporations’ room for maneuver is becoming limited.

Shareholder resistance

We are seeing that it’s harder for our clients to get the equity they need to support awards. Increasingly vocal shareholders are putting up resistance, fearing that dilution will devalue their investments. As a consequence, the pool of equity available to corporations is becoming smaller. With their options limited, companies are now being compelled to look at bonus opportunities and salaries to create change in the CEO compensation profile.

In the first 50 of our 300-firm survey, 2014 saw a 7.8 percent rise in total cash compensation on the previous year. While this figure may change when all the results are in, it gives an early indication of how pay programs are being influenced by a more active shareholder base.

Salaries on the rise

In the US, salaries tend to be lower because of the $1m deductibility limit on non performance-based compensation. Companies have tended to have salaries hover around this limit, which has in turn influenced other components. However, today it would seem that they are less concerned about the limit. This is borne out by our results, which show that while in 2007, 40.5 percent of CEOs had salaries of less than $1m, this had dwindled to just 17.3 percent by 2014.

Explore all the options

Whether or not the salary trend continues, one thing is certain: compensation committees will face more and more pressure from shareholders. This means committees will have to continue exploring all possible options for developing pay programs that support the business, drive behaviours and outcomes, while being compelling to the talent that defines and executes the strategy.

The Wall Street Journal / Hay Group 2014 CEO compensation study will be out soon; in the meantime, see what has happened in the last few years of executive pay: http://www.haygroup.com/us/wsj or register for our June 25th webinar discussing the results.

 

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