The Wall Street Journal / Hay Group CEO compensation survey 2012

Directors Work to Establish “Clear Line of Sight” Between Pay and Performance

PHILADELPHIA, PA, May 16, 2013—Top U.S. public companies made only slight increases to executive compensation levels in 2012, as emphasis shifted further toward long-term performance incentives, according to results from The Wall Street Journal/Hay Group 2012 CEO Compensation Study, released today. The Wall Street Journal partnered with Hay Group for the sixth year on its annual study, which examined how large company CEOs were compensated across all forms of pay in fiscal year 2012.

After seeing CEO pay jump a significant 11 percent in 2010, 2012 marked the second consecutive year that total compensation showed only modest increases. Base salaries grew 1.3 percent to $1.15 million in 2012, while annual incentive payments were flat at $2.1 million. For the third year in a row, however, long-term incentives (LTI) increased, growing 3.8 percent to $7 million. In sum, total direct compensation increased a modest 3.6 percent to $10.1 million in 2012.

When it comes to company performance, the story was mixed. The median company showed a slight 2.1 percent increase in net income from 2011, but had a very strong 14.4 percent total shareholder return (TSR). That’s a reversal from last year, when the median company showed a 13 percent increase in net income from 2010, but only a modest 3.1 percent TSR.

“Companies sought to make their pay programs more attractive to shareholders in 2012, structuring their executive compensation plans to clearly demonstrate alignment between pay and performance,” said Irv Becker, National Practice Leader of the U.S. Executive Compensation Practice at Hay Group. “In the third year of say-on-pay, many companies held pay levels nearly flat, cut perquisites and turned to performance awards as a way to tie executive pay programs to shareholders' desired outcomes.”

In fact, for only the second time in the history of Hay Group’s study, long-term performance plans were the most heavily-weighted piece of the entire pay puzzle, making up 31 percent of the average CEO’s total compensation, up from 26 percent the prior year. When it comes to LTI, specifically, performance awards made up more than half (51 percent) of the LTI value provided to CEOs in 2012, up from 44 percent in 2011. The prevalence of performance awards also increased in 2012, as they were awarded by 80 percent of the companies that grant LTI.

Over the short term, however, it did not necessarily pay to be a top-performing CEO. The top third of net income performers in 2012 improved their company profitability by a median 36 percent, and received a 5.1 percent increase in cash compensation as a result. Low performers, on the other hand, saw profitability decline more than 37 percent in 2012, but experienced only a 4.1 percent decline in cash compensation. All told, top performers fared only 9.0 percentage points better in cash pay increases, despite a more than 70 percent difference in net income change when compared to low performers.

“Many of the low-market equity grants awarded in the first quarter of 2009 vested in 2012, after gaining substantial value in the bull market of the subsequent three years,” said David Wise, Vice President in the U.S. Executive Compensation Practice at Hay Group. “Looking back, it’s likely that some boards overreacted to the market crash in the second half of 2008 by providing their executives with too much equity at depressed stock prices. Today, we’re seeing that play out in the form of narrow pay ratios between top- and low-performing CEOs, and significant growth in realized long-term incentive pay.”

Other key findings from The Wall Street Journal/Hay Group 2012 CEO Compensation Study include:

  • Realized long-term incentive pay continued to grow: For the second year in a row, CEOs experienced significant gains in take-home equity-based pay. In 2011, realized pay increased a marked 34 percent to $5.6 million. However, in 2012, the bull market further enhanced take-home realized LTI values – in the form of stock option exercises and the vesting of restricted stock and long-term cash plans – another 39 percent to $7.8 million.
  • Companies maintained a portfolio-approach to LTI: Eighty-one percent of companies that granted LTI used more than one vehicle, with the most prevalent combination (30 percent) including all three long-term incentive vehicles (i.e., stock options, restricted stock and performance awards). The next most popular combination consisted of stock options and performance awards (27 percent), followed by the combination of performance awards and restricted stock (17 percent).
  • Utilities experienced highs, as Technology experienced lows: CEOs in the Utilities sector saw the largest pay increases (8.6 percent) despite a 3.3 percent drop in net income and a survey-low 1.6 percent one-year TSR. Technology CEOs, on the other hand, saw the lowest pay increases with compensation staying level from 2011 to 2012. That’s as the Technology sector experienced the study’s third-lowest net income change at negative 3.5 percent and second-lowest TSR of 5.5 percent.
  • Financial Services pay held steady: Despite the fact that net income grew 7.3 percent and TSR was the highest of any industry in Hay Group’s study at 23.6 percent, Financial Services companies were – for the second year in a row – very conservative with regards to executive pay, holding compensation nearly flat at 1.7 percent.
  • Perks faced additional cuts: After several years of very few year-over-year changes in perquisites, the pace of change increased significantly in 2012, with nearly every perquisite declining in prevalence. For the fourth year in a row, tax gross-ups on perquisites was the most eliminated perk, falling precipitously in prevalence from 26 percent to 13 percent. Personal use of the corporate aircraft remained the most prevalent perquisite in Hay Group’s study, with 65 percent of companies offering corporate aircraft use as a perk to their CEOs.
“As boards continue to navigate the say-on-pay era, we expect to see more and more companies turning to direct shareholder engagement to clarify elements of their executive pay programs and proactively offset the commentary or recommendations of shareholder advisory firms,” said Becker. “With more pay linked to performance and shareholders taking notice, companies’ next challenge will be to tackle some of the more complicated issues that these plans raise – particularly around long-term goal setting and oversight to ensure executives don’t win when shareholders lose.”

About The Wall Street Journal/Hay Group 2012 CEO Compensation Study
Hay Group’s 2012 study focused on the primary elements of compensation for CEOs of the 300 largest U.S. companies to file their final definitive proxy statements between May 1, 2012 and April 30, 2013. Additional information about the study can be found at http://bit.ly/10Q7SXk. Media inquiries and interview requests can be directed to Aven James at aven@blisspr.com or at 212.840.1661.

About Hay Group’s Executive Compensation Practice
Hay Group’s Executive Compensation Practice works with Compensation Committees and Management at premier organizations across the globe to create tailored solutions that help them meet their governance responsibilities. For more than 60 years, we have helped companies of all sizes and across all industries navigate their complex executive pay issues to achieve desired outcomes and manage exposure. We understand the evolution of compensation practices and help clients manage these changes and prepare for scrutiny. For more information, please contact a consultant in Hay Group’s Executive Compensation Practice at www.haygroup.com.

About Hay Group
Hay Group is a global consulting firm that works with leaders to transform strategy into reality. We develop talent, organize people to be more effective, and motivate them to perform at their best. With 85 offices in 48 countries, we work with over 7,000 clients across the world. Our clients are from the private, public, and not-for-profit sectors, across every major industry and represent diverse business challenges. Our focus is on making change happen and helping people and organizations realize their potential.
The Wall Street Journal | Hay Group 2012 CEO compensation study

The Wall Street Journal | Hay Group 2012 CEO compensation study

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