Paying the Boss: Compensation Rises — as Does Performance Expectations

By Todd Henneman

Feb. 11, 2015

Image courtesy of Thinkstock.

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 that43 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 in tandem with rising profits 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 4percent of CEOs and only 2 percent of other C-suite executives saw a decrease.

Directors Pay Evolves

Lifted by larger equity awards, pay for board members of the largest U.S. companies rose to a median of $240,000 in fiscal 2013, according to research from consulting firm Towers Watson & Co.

That’s 6 percent more than what board members earned in 2012 and 39.5 percent more than what they were paid in 2007, when proxy disclosure rules began requiring companies to report actual values received by directors.

The pay raise came in the form of stock compensation. Cash payments remained flat, but annual and recurring stock awards increased 4 percent.

But the structure behind cash payments has evolved, said Robert Newbury, director of executive compensation resources at Towers Watson.

Companies are moving away from per-meeting fees and toward fixed retainers. Less than one-quarter of companies pay directors per-meeting fees for attending board meetings and only 28 percent pay-per-meeting fees for attending committee meetings, Towers Watson data show.

Retainers have increased for serving on audit committees and others under increased scrutiny and requiring more work in an era of increased shareholder activism and rules in the Sarbanes–Oxley Act of 2002 and other laws, Newbury said.

Aaron Boyd, director of governance research at pay-data firm Equilar Inc., said the more frequent discussions among board members introduced a basic problem with pay-per meeting: What qualifies as a “meeting”?

“We’ve seen companies move away from meeting fees toward retainers because the job has become more involved and because directors are spending more time on it, defining what a meeting fee is a little fuzzier,” Boyd said.

Fortune 500 companies also increasingly separate the roles of CEO and board chair, with 47 percent adopting this board-leadership structure, Towers Watson said.

Calls for independent board chairs were the most prevalent type of shareholder proposal at annual meetings in 2014, according to Institutional Shareholder Services Inc., the nation’s biggest proxy adviser.

“More and more companies are under crosshairs of maintaining independent board leadership and getting people with combined chair and CEO roles to give up that role,” Newbury said.

Companies paid these nonexecutive board chairs a premium — a median of $150,000 — for their services, Towers Watson’s research found.

“When the majority of U.S. companies are separating that role,” Newbury said, “it will be a monumental event in the course of governance practice and board leadership among companies.” 

—Todd Henneman

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,” Boydsaid.

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’stwo 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,” Equilar’s 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 added.

“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 paymentsto cover an outgoing CEO’s Internal Revenue Service bill, Arnold said, and checked absolute compensation growth.

“They’re at the top of everyone’s mind,” he says, “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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