Companies tread lightly with CEO compensation in the era of say-on-pay
PHILADELPHIA, PA, May 21, 2012 – Top U.S. public companies made only modest increases to CEO pay levels in 2011, despite strong company profitability, according to results from The Wall Street Journal/Hay Group 2011 CEO Compensation Study released today. The Wall Street Journal partnered with Hay Group for the fifth year on its annual study, which examined how large company CEOs were compensated across all forms of pay in fiscal year 2011.
After seeing CEO pay jump a marked 11 percent in 2010, total direct compensation grew by only 2.8 percent in 2011 to $10.3 million. Base salaries grew 1.5 percent to $1.2 million, while annual incentive payments were flat at $2.3 million, yielding no increase in overall median cash compensation at $3.6 million. For the second year in a row, long-term incentives (LTI) increased, growing 5.5 percent to $7 million.
Company performance, on the other hand, was mixed. The median company included in Hay Group’s study showed a 13 percent increase in net income from 2010, but only a modest 3 percent total shareholder return (TSR).
“Say-on-pay and the increasing power wielded by shareholders have had a significant impact on how companies approach and communicate their executive pay plans,” said Irv Becker, National Practice Leader of the U.S. Executive Compensation Practice at Hay Group. “Our study showed that companies proceeded very carefully on both pay levels and pay design in 2011. Directors are taking proactive steps to ensure that their executive pay plans are aligned with shareholders' desired outcomes."
The companies that treaded water financially in 2011 actually trimmed their bonus payouts for executives. According to Hay Group’s study, among companies whose net income changed less than 2 percent, more than 75 percent reduced their CEO’s bonus, with total median cash compensation at these companies declining 7 percent.
One area in which CEOs had significant gains was in take-home equity-based pay. Median compensation realized from LTI grants – in the form of stock option exercises and the vesting of restricted stock and long-term cash plans – grew a substantial 34 percent from $4.3 million in 2010 to $5.6 million in 2011.
“Many of the low-market equity grants awarded in the first quarter of 2009 vested in 2011, after gaining substantial value in the prior two years,” said David Wise, Senior Principal in the U.S. Executive Compensation Practice at Hay Group. “This resulted in a significant increase in realized pay for executives in 2011. In hindsight, 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.”
Other key findings from The Wall Street Journal/Hay Group 2011 CEO Compensation Study include:
- Companies align annual performance and pay: CEOs of companies where net income grew the most in 2011 saw significantly greater pay increases than other companies. The top third of net income performers improved their profitability by a median level of 82 percent, and as a result, showed a 9 percent increase in cash compensation. That’s compared to the lower third of companies that saw profitability decline 16 percent and therefore, paid cash compensation that was down more than 7 percent.
- Healthcare saw the largest increases in executive pay: After seeing the smallest pay increases of any sector in 2010, executive pay levels in the healthcare sector increased 7.8 percent in 2011, more than any other sector tracked by Hay Group’s study. Net income of healthcare companies rose only a modest 1.1 percent; however, the sector saw a 9.8 percent one-year TSR. Financial Services reported a modest year in both pay and performance: Heavily-watched financial services companies continued to be conservative in 2011 as they held CEO compensation nearly flat at negative 0.6 percent. Net income grew 2.2 percent in the financial service sector and TSR was negative 4.2 percent.
- Prevalence of long-term performance plans continued to rise: For the first time in Hay Group’s study, long-term performance plans became the most heavily-weighted piece of the entire pay puzzle, making up 27.7 percent of the average CEO’s total compensation, up from 24.5 percent the prior year. Performance awards edged out bonuses in 2011, which made up nearly 25 percent of the pay package.
“A look back at 2011 suggests that say-on-pay had its desired impact, as compensation committees were conservative with their pay decisions in hopes of avoiding negative outcomes on their shareholder votes,” said Becker. “We expect the focus for 2012 to remain on aligning pay and performance; however, the long-awaited rules on several provisions of the Dodd-Frank Act will likely result in additional changes to both pay plans and company disclosures. Long-term, we expect to see fewer features of executive pay programs that companies cannot easily rationalize to their shareholders.”
About The Wall Street Journal/Hay Group 2011 CEO Compensation Study
Hay Group’s 2011 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, 2011 and April 30, 2012. Additional information about the study can be found at http://bit.ly/Llvy8K. Media inquiries and interview requests can be directed to Andrea Friedman at andrea@blisspr.com or at +1.212.840.1661.
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.
