CEO Pay Strategies. Compensation at S&P 500 Companies

Transcription

1 EO Pay Strategies ompensation at S&P 500 ompanies 2013

2 About Equilar Equilar's award-winning product suite is the gold standard for benchmarking and tracking executive compensation, board compensation, equity grants and award policies and compensation practices. Equilar products and custom research services enable corporations, human capital consulting firms, law firms, investors, individual executives, and the media to accurately compare pay packages across thousands of public companies using SE and exclusive survey data. Equilar research is cited frequently by Bloomberg, BusinessWeek, Reuters, The New York Times, The Wall Street Journal and other leading media outlets. Equilar (Redwood ity, A) was recognized as one of the fastest-growing private companies in America by Deloitte, Inc., and the Silicon Valley Business Journal. Equilar, Inc Marshall Street Redwood ity, A Phone: (650) Fax: (650) info@equilar.com 1

3 2013 EO PAY STRATEGIES ompensation at S&P 500 ompanies Introduction 3 Executive Summary 4 Key Findings 5 Report Scope 6 ompensation Trends 8 Total ompensation Rises 9 Bonuses Decline 10 Performance Shares ontinue to Rise 11 Decreasing Presence of Options in 2012 ompensation 12 Equity Award Design 13 Pay By Industry 14 Internal Pay Equity 17 Gender Equilar, Inc. The material in this publication may not be reproduced or distributed in whole or in part without the written consent of Equilar, Inc. This report provides information of general interest in an abridged manner and is not intended as a substitute for accounting, tax, investment, legal or other professional advice or services. Readers should consult with the appropriate professional(s) before acting on information contained in this publication. All disclosure examples in this report are reformatted to fit this document, and certain sections of sample texts may be bolded to add emphasis. If you have questions or comments regarding this publication, please info@equilar.com 2

4 2013 EO PAY STRATEGIES: OMPENSATION AT S&P 500 Introduction 3

5 Executive Summary 2013 EO PAY STRATEGIES: OMPENSATION AT S&P 500 Several years have passed since the most widespread near-economic collapse in generations. The stock markets have recovered to reach new highs while other areas like housing and employment levels are making slow but steady progress. ompanies are finding solid ground after experiencing large market upheavals and sweeping legislative and regulatory changes that required companies to adjust and change with little preparation time. Due to this increased level of stability, the impact of the changes and subsequent responses from companies can now be viewed in a more definitive light. In its third year of mandatory implementation, Say on Pay has not produced the widespread indictment on pay that many thought it would, but it certainly has made an impact. Say on Pay results have remained consistent the last three years with most companies receiving at least 90 percent approval with only two to three percent failing. This strong support for the majority of pay plans, coupled with increased engagement between companies and shareholders has led to altered pay designs as well as new governance policies meant to improve accountability for shareholders, and alignment of pay for management. Interestingly, pay levels continue to go up for top executives. The change is not as dramatic as it was several years ago but EO compensation is growing at levels last seen prior to the recession. This increase can mostly be attributed to the growing stock prices of companies, leading to higher grant-date values on awards year-over-year. What the executives eventually receive will be determined by stock price and financial performance of their companies several years from now. Pay plan changes have led to greater reliance on equity to deliver value to the executive. Specifically, through the use of stronger performance metrics linked to the payout of the award. The trends in this year s EO Pay Strategies study are a continuation of findings from past years reports, reinforcing the idea that companies are still moving toward equity with the use of more performance shares and less options. The move away from cash and toward greater ownership of the company is helping to incentivize executives to seek long-term returns for shareholders. But if the current trends continue executives, along with investors, can expect to realize strong returns. This report is intended to provide a broad-based analysis of S&P 500 EO compensation strategies during the past year. It also provides insight into the differences among various industries, and a review of the characteristics of EO compensation by gender. 4

6 Key Findings 2013 EO PAY STRATEGIES: OMPENSATION AT S&P 500 Total ompensation Rises In 2012, median total compensation for S&P 500 EOs was approximately $9.7 million, up from approximately $9.0 million in 2011, an increase of 6.5 percent. Bonuses Decline Median total bonus payouts for S&P 500 EOs decreased by 5.4 percent, from the 2011 median of $2 million to the 2012 median of $1.9 million. Although the amount of aggregate bonus payouts declined, the prevalence of annual bonus payouts increased from 82.7 percent in 2011 to 83 percent in Accountability for Performance Performance share usage is still on an upward trend. Three-quarters of the EOs at S&P 500 companies received some form of performance-based equity, an increase in 2012 of almost 8 percent from the previous year. Options Decrease as a ompensation Element Option grants declined in 2012 pay packages. The number of EOs receiving option grants decreased from 68.4 percent in 2011 to 60.7 percent in With this decline, we see a reduction of option value as a part of total compensation, although total equity value was approximately 62 percent of compensation in both 2011 and hange in Median ompensation by Industry The Healthcare industry had the highest median EO total compensation in 2012, with a value of $11.1 million. The Industrial Goods industry had the greatest percentage increase from 2011 to 2012, with median EO total compensation rising 22.8 percent. 5

7 2013 EO PAY STRATEGIES: OMPENSATION AT S&P 500 Report Scope 6

8 2013 EO PAY STRATEGIES: OMPENSATION AT S&P 500 Equilar s analysis of S&P 500 EO compensation is based on recently filed proxy data for 323 chief executives at 321 companies in the S&P 500. The companies studied have had the same EOs in place for at least two full years. By selecting only incumbent EOs, the study avoids distortion from new-hire awards, and more accurately tracks year-over-year changes in compensation. The companies included in this report filed their most recent proxy between January 1, and April 30, The key financial characteristics of this group are described in the sections below. Revenue Median revenue for the 321 companies in the study increased by 7.6 percent from 2011 to The median revenue in 2012 was $8.1 billion, compared to $7.5 billion in Average revenue grew by 4.5 percent over the same period. $10.0 $8.0 $6.0 $4.0 $2.0 $0.0 S&P 500 Median Revenue ($BB) $7.5 $ Net Income S&P 500 net income increased for the year, climbing to a median of $677 million in 2012, an increase in median net income of 6.1 percent from $800.0 $600.0 $400.0 $200.0 S&P 500 Median Net Income ($MM) $638 $677 $ Market apitalization In 2012, S&P 500 companies saw a 14 percent increase in median market capitalization, from a median of $11.5 billion in 2011 to a median of $13.1 billion in $16.0 $12.0 $8.0 $4.0 S&P 500 Median Market ap ($BB) $11.5 $13.1 $

9 2013 EO PAY STRATEGIES: OMPENSATION AT S&P 500 ompensation Trends 8

10 Total ompensation Rises 2013 EO PAY STRATEGIES: OMPENSATION AT S&P 500 Median total compensation for S&P 500 EOs increased from $9.0 million in 2011 to 9.7 million in 2012, an increase of 6.5 percent. For this analysis, total compensation includes base salary, annual and long-term cash bonus payouts, the grant date value of stock and option awards made during the year, and other compensation including nonqualified earnings on deferred compensation and all other compensation. For fiscal 2012, base salary, stock and other compensation all increased in median value as compared to Stock awards experienced a 17.2 percent increase, the greatest change of the five components, while median base salary increased 4.4 percent. The largest percentage drop belonged to option awards, which decreased in median value by 16 percent in Bonuses also experienced a drop in median value from $2.0 million in 2011 to $1.9 million in The chart below shows the change in median value for each major compensation component from 2011 to % hange in Median ompensation from 2011 to 2012 for S&P 500 EOs 15.0% 17.2% 10.0% 5.0% 0.0% -5.0% 9.4% 4.4% Salary Bonus Stock Options Other -5.4% -10.0% -15.0% -16.0% -20.0% 9

11 Bonuses Decline 2013 EO PAY STRATEGIES: OMPENSATION AT S&P 500 Aggregate bonus payouts, which consist of annual bonuses (STI Bonus), long-term bonuses (LTI Bonus) and discretionary bonuses, fell from a median of $2.0 million in 2011 to a median of $1.9 million in 2012, a 5.4 percent decrease. The percentage of EOs who received a bonus payout also declined slightly, from 93.2 percent in 2011 to 92.6 percent in The largest share of aggregate bonus payouts was annual bonuses, which increased in prevalence from 82.7 percent to 83 percent of EOs receiving a payout. However, the median value of annual bonuses decreased marginally from $1.56 million in 2011 to $1.55 million in Long-term cash bonuses fell in prevalence, with only 9 percent of EOs receiving a multi-year payout in 2012, compared to 11.5 percent in Payouts of discretionary bonuses decreased as well, from 17 percent in 2011 to 14.6 percent in The following chart shows the prevalence of EOs receiving annual or short-term incentive plan bonuses, long-term incentive plan bonuses, and discretionary bonuses in 2011 and Prevalence of Bonus Payouts for S&P 500 EOs 100.0% 75.0% 50.0% 82.7% 83.0% % 0.0% 17.0% 11.5% 9.0% 14.6% STI Bonus LTI Bonus Discretionary 10

12 Performance Shares ontinue to Rise 2013 EO PAY STRATEGIES: OMPENSATION AT S&P 500 Following the trends of the last few years, performance share grants continued to grow in Three-quarters of executives received at least one grant of performance shares, up from 68.2 percent in the previous year. However, with this rise in performance shares, an almost equal decline was seen in option grants, with 11 percent fewer executives receiving an option grant based on service conditions alone. Restricted stock grants were practically unchanged from previous years, but did show a slight decrease from 2011 to The chart below illustrates the percentage of EOs in the S&P 500 who received at least one grant of the following equity vehicles in both of the last two fiscal years % Equity Vehicle Prevalence 75.0% 50.0% % 51.7% 50.8% 68.4% 68.4% 60.7% 76.2% % Stock Options Performance Shares 11

13 2013 EO PAY STRATEGIES: OMPENSATION AT S&P 500 Decreasing Presence of Options in 2012 ompensation Pay design remained fairly stable between 2011 and 2012 with equity comprising the majority of the value of total compensation. Although equity has accounted for approximately 62 percent of total pay in both of the most recent fiscal years, the role that option grants play has decreased. Option value as a percentage of total compensation has decreased by approximately 3 percent from last year with stock making up the largest difference in this value. This may be explained by the increase in performance share awards, most often granted as stock or units. The following charts represent the average percentage of total compensation that each element of pay represents. 100% S&P 500 EO Pay Mix 20.3% 17.6% 75% Other 50% 25% 41.7% 44.3% 24.7% 23.8% Options Stock Bonus Base Salary 0% 10.1% 10.4%

14 Equity Award Design 2013 EO PAY STRATEGIES: OMPENSATION AT S&P 500 In both of the last two fiscal years, the combination of granting options and performance shares has remained the most popular equity design. The most significant growth in equity mix was seen in granting both restricted and performance-based shares, a method used by twice as many companies as last year. Following the general trend of a reduction in option awards, all equity mixes involving options declined from last year, with the exception of the combination of options and performance shares. With performance shares increasing in popularity, more companies have switched to granting performance shares as their only method of equity compensation, this mix accounts for 44 companies this year as opposed to 33 in Overall, equity is an important factor in compensation, with approximately 3 percent of companies not granting any form of equity to their executives. The following chart shows the number of S&P 500 EOs who received the specified equity mixes. 100 Prevalence of Equity ompensation Design for S&P 500 EOs No Equity 24 Options (O) Only Restricted Stock (RS) Only Performance Shares (PS) Only (O) & (RS) (O) & (PS) (RS) & (PS) (O) & (RS) & (PS)

15 2013 EO PAY STRATEGIES: OMPENSATION AT S&P 500 Pay By Industry 14

16 2013 EO PAY STRATEGIES: OMPENSATION AT S&P 500 Executive pay levels differed by industry in Healthcare companies paid their EOs a median total compensation of $11.1 million, ranking them first for the industries examined for the second consecutive year. hief executives in the Industrial Goods industry were not far behind, with a median total compensation of $11 million. ompared to 2011, in 2012 the Industrial Goods industry also saw a 22.8 percent increase in median compensation. While most industries experienced an increase in pay in 2012, the Basic Materials industry saw its median EO total compensation fall by 1.5 percent. Also, although the Utilities industry had the lowest median total compensation ($7.5 million) in 2012, this value was 9.8 percent higher than the 2011 median. The chart below shows median EO total compensation for each designated industry Median EO Total ompensation ($MM) Basic Materials onsumer Goods Financial Healthcare Industrial Goods Services Technology Utilities All ompanies $7.5 $9.3 $9.5 $9.8 $11.1 $11.0 $10.9 $9.2 $9.7 $0.0 $2.0 $4.0 $6.0 $8.0 $10.0 $12.0 The next chart shows the change in median EO total compensation from 2011 to 2012 for each sector. hange in Median EO Total ompensation from 2011 to % 20.0% 15.0% 10.0% 22.8% Basic Materials onsumer Goods Financial Healthcare Industrial Goods 5.0% 0.0% -1.5% 3.5% 9.3% 5.6% 13.5% 3.1% 9.8% 6.5% Services Technology Utilities All ompanies -5.0% 15

17 2013 EO PAY STRATEGIES: OMPENSATION AT S&P 500 The following chart shows the percentage of total pay in each industry broken down by total cash compensation (salary and bonus), total equity compensation (stock and option awards), and other compensation (benefits, perquisites, and nonqualified earnings on deferred compensation). Average S&P 500 EO Pay Mix by Sector for 2012 All ompanies 34.3% 61.9% Basic Materials 31.8% 63.3% onsumer Goods 36.8% 60.5% Financial 35.0% 62.7% Healthcare 31.5% 66.4% Industrial Goods 41.6% 51.6% Services 35.2% 59.7% Technology 28.5% 68.5% Utilities 32.4% 65.1% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Total ash Total Equity All Other 16

18 2013 EO PAY STRATEGIES: OMPENSATION AT S&P 500 Internal Pay Equity 17

19 2013 EO PAY STRATEGIES: OMPENSATION AT S&P 500 A chief executive officer s pay at a company usually helps to determine the pay given to the other executives at his or her firm. In recent years, more companies have been sensitive to how their EOs pay fares in comparison to that of other Named Executive Officers (NEOs). In 2012, the median EO pay was 2.3 times more than the second-highest paid executive. The pay multiple increases to 3.0 and 3.6 for the third- and fourth-highest paid NEOs. The portion of a EO s compensation that had the largest multiple over the other NEOs was equity, with EOs receiving a median of 2.6 times the equity of the second-highest paid executive. The chart below shows the median pay levels of each NEO and the breakdown of the components that make up their total compensation. Median S&P 500 NEO Pay Levels ($MM) $10.0 $9.0 $8.0 $7.0 $6.0 $5.0 $4.0 $3.0 All Other Equity Bonus Base Salary $2.0 $1.0 $0.0 EO

20 2013 EO PAY STRATEGIES: OMPENSATION AT S&P 500 The pay multiple between the EO and the second-highest paid executive may increase or decrease depending on the industry in which the executive works. Utility and Industrial Goods had the largest EO to second-highest paid NEO pay multiples of 3.0 and 2.9, respectively, followed by onsumer Goods and Basic Materials with a 2.7 multiple. The industries with the lowest pay multiple were Financial Services and Services, where the EO received approximately 2.2 times the compensation of the second-highest paid NEO. The chart below shows the multiple of the median EO pay and the median of the second-highest paid executive. 3.0 EO to #2 Multiple by Industry Basic Materials onsumer Goods Financial Services Healthcare Industrial Goods Services Technology Utilities All ompanies 19

21 2013 EO PAY STRATEGIES: OMPENSATION AT S&P 500 Gender 20

22 2013 EO PAY STRATEGIES: OMPENSATION AT S&P 500 An increasing number of females are becoming -Suite level executives at large companies. However, the commonly discussed subject of pay discrepancies between female employees and their male counterparts often implies that women receive less compensation than men. Subsequently, we analyzed the female and male EO pay from the large companies we observed. There were only nine female hief Executive Officers in this year s study. The number of female EOs was small, but their characteristics remained similar to those of male EOs. Female EOs received 16.3 percent more in median pay in 2012, as compared to male EOs. Due to the small sample size of females in this study, no conclusions could be drawn from the data. The table below shows a summary of certain characteristics from EOs of both genders. EO haracteristics by Gender Female (n=9) Male (n=314) Median Pay $11,166,819 $9,605,432 Tenure Most Prevalent Industry (% of EOs) onsumer Goods, Technology (Both 33%) Financial (21%) 21

23 2013 EO PAY STRATEGIES: OMPENSATION AT S&P 500 How EOs of both genders receive their compensation is also interesting. In 2012, female EOs received approximately 31 percent of their compensation in cash and 68 percent in equity. Male EOs, on the other hand, received about 34 percent of their total compensation in cash and 62 percent in equity. While the numbers show that female EOs receive less cash and more equity than male EOs, these results may be influenced by other factors, such as the industries where female EOs are more prevalent. Average S&P 500 EO Pay Mix by Gender Female 31% 68% Male 34% 62% 0% 25% 50% 75% 100% Avg ash Avg Equity Avg Other 22

24 2013 EO PAY STRATEGIES: OMPENSATION AT S&P 500 Lastly, we compared the pay multiple to NEOs of each gender. Female EOs had a 2.5 multiple over the next highest paid executive at their companies, and male EOs had a 2.2 multiple. Once again, it is worth noting that this particular observation may not be strong statistically because of the small number of female EOs in the study. 3.0 EO to #2 Pay Multiple by Gender Female Male For more information, please contact Aaron Boyd at aboyd@equilar.com. Aaron Boyd is the Director of Governance Research at Equilar. The contributing authors of this paper are Hardeep Dhillon, Senior Research Analyst, Shelby Dempsey and helsea Park, Research Analysts. 23

25 24