On the back of strong company performances in the US, the level of compensation for US CEOs is up again, with the total median compensation package increasing 13.5% to hit $13,563,355. The way in which compensation is being calculated has changed however, with shareholders forcing more and more pay decisions to be made on the basis of company performance, whose total share of the compensation pie has increased from 21% in 2010 to 32% in 2014.
CEO compensation has been a hot topic in recent years. In a recent survey of the 300 largest companies operating in the US, titled ‘Cooking up a Better Pay Mix: Active Shareholders Emerge as a New Ingredient’, HR consulting firm Hay Group researches the role of shareholders in these companies’ pay decisions.
Hay Group finds that the total shareholder return (TSR) remained robust in 2014, even if it has fallen from its 2013 high; generating returns of 16.6% in 2014 compared to 34.2% in 2013. Companies in 2014 enjoyed a net-income increase of 6.6% on the year before.
Rewarding the top
With the strong performance in returns across the board, companies have continued to keenly reward CEOs. The base pay averaged across the companies was up 2.0% to $1.2 million while annual incentives rose 4.3% to $2.5 million, yielding a 4.1% increase in median annual compensation to $3.7 million. However, adding in further compensations, such as long-term incentive grants, up a median of 5.6% in 2014 to $8.1 million, and quantifying nonqualified deferred compensation earnings plus the change in pension value, as well as all other compensation, total CEO compensation was up 13.5% to $13,563,355.
Pay by sector
Different sectors enjoyed different levels of increases in total direct compensation. The service industry, where total direct compensation (TDC) increased 10.1% experienced a TSR of 22.6%. Healthcare companies too saw a strong rise in TDC, up 8.4% with an even stronger TSR of 23%. Technology companies however, saw their TDC remain flat in 2014, even with a strong TSR at 24.3%. The financial sector too saw little growth in pay, with financial institutions – and their shareholders – hawkish about being seen too rewarding after the recent financial mess. Within financial companies, salary bonus stayed flat, while TDC increased 4.3% on the back of a 10.8% TSR.
Changing the mix
With the recent financial crisis highlighting potential conflicts in the sometimes high rate of compensation for bosses relative to lower level employees and performance, shareholders have become more active in developing compensations deals for CEOs that reflect performance. As a consequence of their action, the share of salary in the total pie dropped from 18% to 14% between 2010 and 2014, while bonus and annual incentives dropped from 29% to 22%. Restricted stock in contrast grew 2% to 16% from its 2010 level, while performance based pay now makes up the largest share, up from 21% in 2010 to 32% in 2014.
The incentive based component of compensation decreased marginally away from stock options toward more performance based compensation, with 85% of surveyed companies using a performance based vehicle, compared to 72% last year. Performance equity grew from 66.3% in 2013 to 79.3% in 2014, while performance cash was only 12.7% in 2014 and 13.3% in 2013. The long term incentive mix has changed, with performance based awards increasing from 48.9% to 50.8% between 2013 and 2014 and restricted stock increasing slightly from 23.6% to 23.7%.
One aspect of the wider remuneration packet to see a fall in 2014 relative to 2013 is perquisites, with tax gross-ups down from 14% to 9.4%, supplemental life insurance falling from 40.5% to 34.6%, supplemental disability from 18.2% to 14.6%, while club memberships dropped from 19.8% to 18.1%. Certain perks remained strong however, with the use of corporate airplane usage remaining relatively stable at 75.2%, while home security was up slightly, from 41.3% to 41.7%, while access to company cars increased from 46.3% to 47.2%.