Compliance

Paying the Boss: Compensation Rises — as Does Performance Expectations

By Todd Henneman

Apr. 20, 2015

As the 2015 proxy season nears, a new survey of executive compensation hints that the C-suite has fared well in the past year.

The Association of Executive Search Consultants surveyed 900 members of its candidate database in October and November 2014 and found that 43 percent of the CEOs and 56 percent of other C-suite executives got base salary increases in 2014. Of CEOs whose compensation grew, almost one-quarter got raises of 16 percent or more.

The raises reflect a closer alignment between CEO compensation and company performance, said Julia Salem, senior marketing manager at the association. The U.S. market ended 2014 with solid gains. Executive pay has increased as profits have risen now that the economy has emerged fully from the recession, she said.

Few C-level executives saw their pay dip. The 2014 AESC’s “BlueSteps Executive Compensation Report” shows that 4 percent of CEOs and only 2 percent of other C-suite executives saw a decrease.

The average CEO compensation in AESC’s survey was $312,494.

The AESC cautions against using its data to predict what proxy filings will show. To be sure, AESC’s survey captures data from a diverse group of organizations. Its executives lead organizations with annual revenue from less than $5 million to more than $50 billion. Sixty-eight percent are privately held, 28 percent are public and 4 percent are nonprofit. The average CEO compensation in AESC’s survey was $312,494.

It is the latest report showing that CEO compensation has been surging.

At Standard & Poor’s 500 firms, the median total compensation for CEOs was $10.1 million in 2013, according to compensation-research firm Equilar Inc., up from $9.3 million in 2012. That’s more than $27,671 per day. Companies will disclose executive compensation for 2014 as they file proxy statements in the coming months.

Trends that have defined the makeup of executive compensation are expected to remain dominant in 2015, experts say.

CEO compensation continues to shift toward equity with performance hurdles, said Aaron Boyd, director of governance research at Equilar. Never before has as much of CEO compensation come from equity as it does now, Equilar data show.

“What I think you’re really starting to see now — because a lot of people have moved to performance in equity in the last several years — is a refinement of it,” Boyd said.

A decade into the trend, companies have gained a better sense of how to set reasonable-yet-challenging targets with effective metrics that serve investors.

Simultaneously, discretionary bonuses have fallen out of favor with shareholders.

“Positive discretion is one of those things we don’t see exercised very often,” Boyd said. “And when it is, it’s highly securitized.”

The trends have resulted in what compensation consultant Greg Arnold calls “homogenization” as companies comply with what Institutional Shareholder Services Inc. and Glass Lewis & Co., the nation’s two major proxy advisers, consider to be good pay programs.

“Homogenization doesn’t make sense for all companies and all circumstances,” said Arnold, a principal at Semler Brossy, an executive-compensation consulting firm. “The challenge for the [compensation] committee is to figure out when to go along with those things that are viewed as ‘best practice’ and when to deviate.”

Some compensation committees are beginning to question the reliance on what has emerged as the most popular gauge: total shareholder return.

“It’s not the silver bullet metric that solves every problem,” Boyd said.

A key shortfall: Total shareholder return tends to reward companies that are more volatile because they’ll rebound from lower performance and then outperform because of their low starting point,  Arnold said.

“These things started to get put in place at the beginning of Say on Pay,” Arnold said. “Now people are starting to see payouts on them and starting to realize maybe they’re not exactly what they thought they were.”

Public companies have been required to conduct Say on Pay votes since 2011. These nonbinding votes have largely ended gross-up payments to cover an outgoing CEO’s IRS bill, Arnold said, and checked absolute compensation growth.

“They’re at the top of everyone’s mind,” he said, “and they drive a lot of the plan design elements we’re seeing.”

Todd Henneman is a writer based in Los Angeles.

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