Looking Ahead to Executive Pay Practices in Executive Summary

Transcription

1 Looking Ahead to Executive Pay Practices in 2019 Executive Summary

2 Table of Contents Introduction Compensation Committee Oversight Roles Executive Compensation Philosophy Pay Projections Tax Reform Impact Annual Incentives Long-Term Incentives (LTI) Gender Pay Equity and #MeToo Issues About the Survey About Pearl Meyer Pearl Meyer On Point: Looking Ahead to Executive Pay Practices in

3 Introduction Pearl Meyer s Looking Ahead to Executive Pay Practices is an annual online survey and serves as a valuable compensation planning tool. This year s survey was conducted in August and September of 2018, with input from 279 companies, including 195 publicly traded, 63 private, and 21 not-for-profit (NFP) organizations. The survey addresses a number of fundamental compensation philosophy issues such as external benchmarking criteria and target pay positioning versus market. Also included are expected pay outcomes for Fiscal 2018 and projected pay opportunities for 2019, incentive plan design, and actions taken or anticipated in response to recent developments such as tax reform, gender pay equity discussions, and #metoo-related issues. Prevalence of and anticipated actions relating to redundant short-term and long-term incentive plan metrics are also explored. Pearl Meyer On Point: Looking Ahead to Executive Pay Practices in

4 Introduction (cont.) This year s survey includes the following seven industry groups: business and other services, consumer discretionary/staples, financial/insurance/real estate, healthcare, industrials/materials, technology, and energy/utilities. (Certain industry categories in the online questionnaire were combined to allow for more meaningful sample sizes.) The complete report features all responses broken out into dozens of detailed data tables and organized by respondent role (board member or employee) and company ownership type, industry, and revenue size. It is available for purchase here. The following is a summary of some of the key highlights in this year s survey. Please feel free to contact me with any questions. Bill Reilly Principal bill.reilly@pearlmeyer.com Pearl Meyer On Point: Looking Ahead to Executive Pay Practices in

5 Compensation Committee Oversight Roles Compensation committee oversight responsibilities vary by ownership type. Pay is reviewed for all corporate officers by 50% of public company respondents compared with only 12% at private organizations. 100% 80% 60% 40% 20% 0% Which executive positions does your board's compensation committee review? 80% 81% 76% 66% 51% 54% 50% 38% 10% 7% 77% 81% 41% 46% 43% 33% 19% 12% 13% 10% Total Public Private Not-for-Profit CEO Direct reports to the CEO Other All other named executive officers All Section 16 officers Pearl Meyer On Point: Looking Ahead to Executive Pay Practices in

6 Compensation Committee Oversight Roles (cont.) Most committees (75%) are also responsible for non-employee director compensation and executive succession planning (67%), with 41% also overseeing leadership and talent development. Only 22% are currently involved in corporate culture oversight. Given the #metoo movement, we expect prevalence in this area to increase going forward. Which of the following, in addition to executive compensation, are handled by the board's compensation committee? 80% 70% 75% 67% 60% 50% 40% 41% 30% 20% 10% 22% 7% 0% Board of director compensation Executive succession planning Corporate culture oversight Leadership and talent development Other Pearl Meyer On Point: Looking Ahead to Executive Pay Practices in

7 Executive Compensation Philosophy Most respondents (62%) have a formal, written executive compensation philosophy. This prevalence is much higher for public companies (71%) vs. non-public organizations (40%) and increases with company size. Twenty-seven percent of respondents have an informal, undocumented philosophy. Approximately one quarter of non-public respondents (27% private and 25% NFP) do not have any compensation philosophy. 80% 70% 60% 50% 40% 30% 20% 10% 0% 62% Does your company have an executive compensation philosophy? 27% 11% 71% 25% 4% 40% 40% 32% 35% 27% 25% All respondents Public Private Not-for-Profit Yes, formal/documented Yes, informal/unwritten No Pearl Meyer On Point: Looking Ahead to Executive Pay Practices in

8 Executive Compensation Philosophy (cont.) When asked to rank the top three criteria for determining market benchmarking comparators, the most commonly cited responses in rank order of importance are industry (63%), company size (47%), and advisory group/analyst peers (19%). Only 33% of NFP respondents include ownership type among their top three criteria. Most Important Second Most Important Third Most Important Industry Company Size Advisory Group/Analyst Peers 63% 47% 19% Pearl Meyer On Point: Looking Ahead to Executive Pay Practices in

9 Executive Compensation Philosophy (cont.) Public company respondents have a higher prevalence of targeting pay at the 50 th percentile than other ownership types, presumably due to greater external scrutiny as well as pay mix differences. Targeted positioning varies by pay component, with companies generally more conservative with base salaries versus short-term and long-term incentives. Above median pay positioning is highest for private respondents 41% target total direct compensation above the 50 th percentile. 60% 50% 40% 30% 20% 10% 0% Where does your organization target total direct compensation for executives versus the external market? At or near 25th percentile Between 25th and 50th percentiles At 50th percentile Between 50th and 75th percentile At or near 75th percentile No targeted positioning/not applicable All respondents Public Private Not-for-Profit Pearl Meyer On Point: Looking Ahead to Executive Pay Practices in

10 Pay Projections Most companies are projecting executive salary increases of 3% for the CEO and direct reports. Seventy-seven percent of respondents plan to increase salaries for the CEO and 90% plan to do so for direct reports. Projected Base Salary Increases (Including 0% Values) Projected Base Salary Increases (Excluding 0% Values) 4.0% 3.0% 2.0% 1.0% 2.0% 2.5% 3.0% 3.0% 3.0% 3.5% 3.8% 3.6% 3.4% 3.2% 3.0% 2.8% 3.0% 3.0% 3.0% 3.0% 3.6% 3.5% 0.0% 25th Percentile Median 75th Percentile 2.6% 25th Percentile Median 75th Percentile CEO Direct Reports CEO Direct Reports Pearl Meyer On Point: Looking Ahead to Executive Pay Practices in

11 Tax Reform Impact Tax reform has not had a significant impact on executive compensation design or practices to date, as 69% of respondents are not making or considering any changes, 15% are considering some future action, and only 3% have actually made changes thus far. Have the new tax laws changed your company's approach to executive compensation? 13% 3% Yes 15% No 69% Not yet, but may in the future Unsure Pearl Meyer On Point: Looking Ahead to Executive Pay Practices in

12 Annual Incentives Most respondents (79%) maintain formal incentive plans with pre-assigned award opportunities and weightings for metrics. Awards are tied primarily to objective financial goals at the corporate or business unit level, with the remainder equally allocated between corporate/business unit non-financial and individual components. For 2019, approximately half of all respondents have made or are considering annual incentive plan design changes. 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 79% Pre-assigned award opportunities & weighted metrics Basis for Award Funding 9% Pre-established award opportunities, but no weighted metrics 5% 4% Award pool allocation No weightings 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2019 Performance Mix 10% 11% 11% 12% 80% 76% CEO Direct Reports Corporate/BU financial Corporate/BU non-financial Individual Pearl Meyer On Point: Looking Ahead to Executive Pay Practices in

13 Long-Term Incentives (LTI) Most companies grant time-based and performance-based equity to senior executives, although vehicle prevalence varies considerably by ownership type, as does the target value mix. Private companies rely primarily on cash LTIP (40%) or phantom stock (16%). Most NFP respondents do not provide LTI awards to senior executives, with 35% using performance cash. About half of organizations with LTI plans are considering one or more modifications for Which LTI award vehicles does your organization grant to senior executives? Stock options Time-based restricted stock/units Performance-based stock/units Performance-based cash Phantom stock Other/not applicable 0% 20% 40% 60% 80% 100% Not-for-Profit Private Public All Firms Pearl Meyer On Point: Looking Ahead to Executive Pay Practices in

14 Gender Pay Equity and #MeToo Issues A majority of respondents plan to conduct a study on gender pay issues, with 36% focusing on the broader employee population and 18% limiting their review to management or senior executives. Only 6% of respondents have made or are considering changes to existing policies or agreements in response to the #metoo movement. Has your company planned a study on gender pay equity? 40% 35% 30% 25% 20% 15% 10% 5% 0% Yes, at the broad-based employee level Yes, at the management team level Yes, for all named executive officers We have discussed it, but have no current plans No Pearl Meyer On Point: Looking Ahead to Executive Pay Practices in

15 About the Survey Role of Respondents 59% 4% 18% 3% 16% Board Member: Compensation Committee Board Member: Not on Compensation Committee Employee of the Company: C-Level Executive Employee of the Company: Human Resources Other Organization Ownership Status 8% 23% Public Private Not-for-Profit 70% Pearl Meyer On Point: Looking Ahead to Executive Pay Practices in

16 About the Survey (cont.) 25% 20% Organization Revenue Range or Asset Size 23% 19% 18% 15% 10% 5% 10% 7% 11% 5% 8% 0% Under $100M $100M to less than $300M $300M to less than $1B $1B to less than $3B $3B to less than $10B $10B to less than $20B $20B to less than $30B $30B or greater Reporting Revenue vs. Asset Size 28% Revenue Range Asset Size 72% Pearl Meyer On Point: Looking Ahead to Executive Pay Practices in

17 About Pearl Meyer Pearl Meyer is the leading advisor to boards and senior management on the alignment of executive compensation with business and leadership strategy, making pay programs a powerful catalyst for value creation and competitive advantage. Pearl Meyer s global clients stand at the forefront of their industries and range from emerging high-growth, not-for-profit, and private companies to the Fortune 500 and FTSE 350. The firm has offices in New York, Atlanta, Boston, Charlotte, Chicago, Houston, London, Los Angeles, and San Jose. Pearl Meyer On Point: Looking Ahead to Executive Pay Practices in

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