Blog Article

Record returns for shareholders but conservative pay increases for CEOs

Posted by Matthew Kleger

Matthew Kleger

Over the past seven years, Hay Group has prepared The Wall Street Journal’s annual CEO pay survey – the most widely read piece in the US on executive compensation. During that time, we’ve gathered a tremendous amount of data and trends on CEO pay in the largest 300 US companies. Our most recent study covered proxy statements filed in the 12-month period ending April 30, 2014.

What did we find?

This year, CEO direct pay (base salary + annual incentive + long-term incentives) went up, but at a fairly modest rate in the context of shareholder returns. We found these overall pay level increases for CEOs:

  • Base salary: 1.7% – median of $1.21M
  • Annual incentives: 4.0% – median of $2.31M
  • Total cash compensation: 3.7% – median of $3.56M
  • Long-term incentives: 3.8% – median of $7.89M
  • Total direct compensation: 5.5% – median of $11.43M

Meanwhile, median total shareholder return (TSR) jumped an incredible 33.8%.

What do these findings tell us?

This data certainly suggests that companies have been listening to what shareholder and proxy advisory firms have to say. With such high overall returns to shareholders, companies could have easily defended or justified larger annual pay increases for their CEOs.

So why were they conservative in 2013? Because the results of the past are a constant reminder to companies, their boards and shareholders that CEO pay is a sensitive issue. For years now, the media have “called out” companies for high pay increases; in some years, CEOs made headlines for the sheer size of the gains made from exercising their mega option grants. And historically, they received double digit pay increases even when financial results and shareholder returns couldn’t support such levels. It wasn’t long before shareholder activist groups developed and made themselves heard in the “pay for performance” debate.

In 2006, the Securities and Exchange Commission (SEC) jumped in and made major revisions to the proxy statement reporting requirements. Since then, the SEC has required companies to disclose – in plain English – all the elements of pay and performance in the proxy statement’s Compensation Discussion and Analysis section. The SEC also has made it virtually impossible for a public company to “hide” any pay received by the CEO, the CFO, and the other named executive officers.

What does this mean now and for the future?

As a result, and in the interest of “no surprises”, we’ve recently seen companies make direct conversations with their largest shareholders part of their annual compensation decisions. Keeping those channels open should help firms in a year when executive pay continues to rise, even when TSR is down – a true test of the developing relationship between a company and its shareholders.

Along with the executive pay data, companies report other details in their proxy statements, such as short- and long-term incentive plans (metrics, performance/payout calibration, etc), executive perquisites, stock ownership guidelines and holding requirements, and director compensation and benefits. It’s only a matter of time before we summarize those results every year, too.

Read the summary results of The Wall Street Journal / Hay Group 2013 CEO Compensation Study.

Blog written by Matthew Kleger and Steve Sabow.


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