NEW YORK--(BUSINESS WIRE)--CEO compensation at large U.S. companies is closely aligned with their actual performance, according to a new study by Pay Governance, LLC, one of the nation’s premier independent executive compensation consulting firms.
A review of SEC proxy filings found that executive payouts under both annual and long-term incentive plans are closely linked to actual company performance reflected in total shareholder return (TSR) and in growth of earnings per share (EPS). Payouts to executives at high-performing companies were greater than for their counterparts at low-performing companies. The study was conducted during fall 2010 and included 100 large U.S. companies that had filed their proxies by the first quarter of 2010.
“These findings are consistent with other pay-for-performance research we have done on thousands of companies over the past 10 years, as well as industry studies performed for many of our clients,” said Pay Governance Managing Partner Ira Kay. “While our results reflect payouts from 2010 proxies, we find that reviewing historical information to be a valuable reference when considering current year payouts. Thinking about and carefully reviewing the relationship between pay and performance will be a critical step for companies as they prepare for proxy disclosure and “say-on-pay” votes in 2011.”
Annual incentive payouts to CEOs in both 2008 and 2009 at high-performing companies were well above the payouts at low-performing companies. At high-performing companies in 2009, CEOs earned 146% of target incentive while driving EPS growth by 23%. Conversely, 2009 payouts to CEOs at lower-performing companies fell below target (93% of target incentive) as EPS declined by 23%. The spread between high- and low-performing companies in 2008 was even more considerable, as high achievers received 119% of target compared to 21% for low performers.
After many corporate compensation committees reduced annual incentive plan goals for 2009 due to worsening forecasted economic conditions in early 2009, overall median annual incentive plan payouts rose to 125% of plan from lower average payout levels in 2008. Actual company performance during the year exceeded both those lower expectations and 2008's performance payout of 95%.
“Comparing payouts to one-year company performance shows that there is true pay for performance - high-performance companies paid their executives more as a percent of target than their low-performing counterparts in 2008 and 2009. We anticipate similar alignment between pay and performance for 2010 incentive plans and that payouts will reflect the strong performance we witnessed in the market through the year,” said Kay.
These payout patterns were repeated in multi-year performance share plans. Payouts under CEO long-term plans at high-performing companies significantly exceeded those at low-performing companies and the overall median number of shares paid under these plans was also commensurate to target – 100% in 2008 and 95% in 2009. As the market and shareholders suffered from falling stock prices, executive compensation values dropped as well, resulting in reduced value of long-term performance plan payouts. When long-term cash plans were combined with the value yields of these shares, the overall median payout values fell below target, to 81% of target in 2008 and 82% for 2009.
This pay-for-performance trend for both annual and long-term incentive plans has been consistent over the past four years as CEO’s at high-performing companies have consistently out earned their low-performing counterparts, according to the study.
For an interview, call Don Rountree at 770-645-4545.
About Pay Governance
Pay Governance LLC is an independent consulting firm focused on delivering advisory services on executive compensation. Our focus is on providing sound advice and counsel on how pay programs attract, retain, and motivate executives to create shareholder value. The firm helps compensation committees and management ensure that compensation programs align pay with performance, while being supportive of appropriate corporate governance and risk structures. For more information, visit www.paygovernance.com.
Addendum
| Table 1. Annual Incentives vs. One-Year EPS Growth | ||||||||||||
| 2008 | 2009 | |||||||||||
| EPS Growth | Actual % of Target | Count | EPS Growth | Actual % of Target | Count | |||||||
| High Performers | 18% | 119% | 36 | 23% | 146% | 33 | ||||||
| Low Performers | -55% | 21% | 36 | -23% | 93% | 33 | ||||||
| Overall | -3% | 95% | 72 | 1% | 125% | 66 | ||||||
| Table 2. Performance Shares (number) vs. Three-year TSR | ||||||||||||
| 2006 - 2008 | 2007 - 2009 | |||||||||||
| TSR CAGR | Actual % of Target | Count | TSR CAGR | Actual % of Target | Count | |||||||
| High Performers | 4% | 119% | 18 | 2% | 99% | 18 | ||||||
| Low Performers | -9% | 87% | 18 | -7% | 89% | 18 | ||||||
| Overall | -3% | 100% | 36 | -1% | 95% | 36 | ||||||
| Table 3. Performance Shares and Cash ($value) vs. Three-year TSR | ||||||||||||
| 2006 - 2008 | 2007 - 2009 | |||||||||||
| TSR CAGR | Actual % of Target | Count | TSR CAGR | Actual % of Target | Count | |||||||
| High Performers | 4% | 123% | 27 | 2% | 110% | 28 | ||||||
| Low Performers | -13% | 68% | 27 | -8% | 68% | 28 | ||||||
| Overall | -2% | 81% | 55 | -2% | 82% | 56 | ||||||