CEO Pay Up But Bonuses, Stock Options Shrink

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Median pay for chief executive officers at the largest American companies increased from $9.3 million in 2012 to $10.1 million in 2013, largely due to a vigorous U.S. stock market, according to consultancy Equilar Inc.’s 2014 CEO Pay Strategies Report. However, stock options are making up less of senior leaders’ total compensation, researchers found.

“The change in pay mix … is due in large part to the push from investors to see greater linkage between pay and performance,” said Equilar’s Director of Governance Research Aaron Boyd in an e-mail interview with SHRM Online. “Investors want to see greater accountability of executives through their compensation and, with the disclosure rules that have changed over the years, shareholders now have the information available to push companies in this direction.”

Equilar, which benchmarks and tracks executive and board compensation for 70 percent of the Fortune 500 (the largest companies in the world) also provides executive pay and corporate governance data for organizations, institutional investors and the media.

“In place of … bonuses, CEOs are much more likely to receive short-term incentive plan payouts, whose inner workings and performance linkage are more readily apparent to shareholders,” the report states. “Discretionary bonuses are most popular among smaller and higher-performing companies.”

Boyd added that the most significant changes in this year’s study “are the growing prevalence of performance shares, as they are the dominant feature in CEO pay.” He added that “these awards connect the payouts executives receive to the performance of the company through pre-determined metrics,” of which economic growth was a contributing factor. “This means a stronger connection between pay and performance. Another interesting development is the change in disclosure around pay. Companies are putting in more effort to describe the pay packages and explain why certain decisions were made to design it that way,” he said.

“To the interested observer,” the report states, “CEO compensation plans can serve both as reflections of broader economic circumstances and as beacons that illuminate shareholders’ expectations of their chief executives.”

Additional findings from the report:

  •          75.7 percent of CEOs in the Standard and Poor’s (S&P) 500 index were given performance-based equity grants, an increase of 4.7 percent from 2012.
  •          17.5 percent of the value of an average S&P 500 CEO’s 2013 pay package consisted of stock options, down from 18.0 percent in 2012 and 23.1 percent in 2009.
  •          13 percent of S&P 500 CEOs received only performance-based equity.
  •          The average age of an S&P 1500 CEO fell from 53 in 2009 to 51 in 2013, despite rising average tenure over the same time interval.

While being the top-most executive has traditionally been seen as “an old-man’s game, CEOs near the top of the age distribution are increasingly being replaced with CEOs in their late 40s and early 50s, and women represent a small, yet rising share of CEOs,” the report states.

SHRM Online reported on research from consultancy Towers Watson that revealed how differences among executive compensation programs correlate to performance.

High-performing companies place more weight on stock options, aim wages at market median levels and diversify approaches in designing their executive pay plans, the Towers Watson report states.

Said Boyd: “I think the trends we’re seeing in pay will continue as long as the market continues to perform well. If the market drops, we’re likely to see pay decrease.”

Aliah D. Wright is an online editor/manager for SHRM.

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