The CAP 100 Company Research consists of 110 companies from 10 industries, selected to provide a broad representation of market practice among large U.S. public companies. In this report, CAP reviewed Pay Strategies, Annual Incentives, Long-Term Incentives, Perquisites, and Shareholder Friendly Provisions of these companies in order to gauge general market practices and trends.


Characteristics of the CAP 100 Company Research Sample

The CAP 100 Research Study now consists of 110 companies selected from ten industries intended to provide a broad representation of market practice among large U.S. public companies. The fiscal year revenues of the companies in our sample range from approximately $5 billion to $500 billion (median revenue $32.2B). The sample is further summarized in the following exhibits.

10% 11% 11% 10% 11% 9% 9% 9% 10% 10% Automotive Consumer Goods Financial Services Health Care Manufacturing Insurance Oil and Gas Pharmaceutical Technology Retail Industries

Percentile

Revenue

Net Income

Assets

Market

Cap

Cumulative Total Shareholder Return (TSR) ending on 12/31/2017

1-Year

3-Year

5-Year

75th

$66,735

$5,280

$178,819

$136,975

104%

85%

56%

Median

$32,207

$2,567

$62,431

$57,469

65%

62%

36%

25th

$19,542

$1,303

$32,696

$31,636

44%

39%

25%

Note: Financial Data ($mil.)

Pay Strategy

Among companies in the CAP 100 Research, 98% use a peer group of public companies for pay benchmarking purposes. The median number of companies in a peer group is 18 companies.

Approximately one-third (32%) of the companies with a peer group use more than one peer group. Companies with two or more peer groups typically use an industry-specific peer group as well as a general industry peer group for benchmarking purposes. Other companies with two or more peer groups use an industry peer group for benchmarking purposes and a second broader peer group, typically from an index of stocks, for relative performance comparisons.

Peer Group (n=108)

% of companies with a disclosed peer group

% of companies with more than one peer group (among companies with a peer group)

Median # of companies in peer group

98%

32%

18

53% of the companies disclose a target pay philosophy for total compensation. Most of these companies (93%) use median as a benchmark, with only 7% of companies targeting total compensation above the median.

Target Pay Philosophy (n=58)

Element

Base

Bonus

Cash

Long-Term Incentive

Total Compensation

% Disclosing

40%

30%

29%

32%

53%

% Target Below Median Pay

7%

% Target Median Pay

89%

97%

97%

97%

93%

% Target Above Median Pay

4%

3%

3%

3%

7%

Annual Incentive

Award Leverage

CAP reviewed proxy disclosures to understand how companies establish annual incentive (bonus) payout ranges (i.e., threshold payout and maximum payout expressed as a percentage of the target award). Approximately half of companies disclose a threshold bonus payout at a defined level other than zero. A threshold payout of 50% of the target award is most common; in general, the range among our sample was 25% to 50% of target. Other companies start at a 0% payout for threshold performance with payout levels progressing to target.

93 of 110 companies disclose a maximum bonus opportunity. Most companies (75%) have a maximum bonus opportunity of 200% of the target award. The number of companies in our study with maximum payouts above 200% (8 total) decreased by almost one-third compared to last year’s study (11 total).

Annual Incentive Plan Payout Range

Threshold Payout as a % of Target (n = 51)

Range

# of Cos.

% of Cos.

< 25%

10

20%

> 25% to < 50%

15

29%

50%

25

49%

> 75% to < 100%

1

2%

Maximum Payout as a % of Target (n = 93)

Range

# of Cos.

% of Cos.

> 100% to < 150%

3

3%

> 150% to < 200%

13

14%

200%

69

75%

> 200% to < 250%

4

4%

250% or more

4

4%

Annual Incentive Plan Metrics

Operating Income (including EBITDA and EBIT), Revenue, Cash Flow, and EPS continue to be the most common metrics used in annual incentive plans. Most companies fund annual incentive plans using two or three metrics. These metrics are typically measured against absolute financial performance targets based on budget. The use of multiple performance metrics allows for annual incentive payouts to be tied more closely to overall company performance in a balanced fashion.

21% 38% 41% Number of Metrics 1 Metric (n=21) 2 Metrics (n=37) 3 Metrics (n=40)

The use of Cash Flow, EPS and Return Metrics all increased slightly (by 3% to 4%) versus 2016. We are also seeing an increased use of strategic measures, more formally, in incentive plans.

Annual Incentive Metric Prevalence 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% EBITDA / EBIT /Op. Income Revenue CashFlow EPS StrategicGoals ReturnMetrics NetIncome Pre-TaxIncome Pipeline /R&D OperatingEPS OperatingMargin 45% 43% 34% 33% 30% 14% 10% 9% 7% 4% 4%

The chart below shows the three most common metrics by industry in 2017:

Industry

Metrics

Metric #1

Metric #2

Metric #3

Automotive

Cash Flow (73%)

Strategic Goals (55%)

EBIT / Op. Income (45%)

Consumer Goods

EPS (67%)

Revenue (58%)

EBIT / Op. Income (42%)

Financial Services

EPS (33%)

Return Metrics (17%)

n.m.

Health Care

EPS (64%)

Strategic Goals (45%)

Op. Income (36%)

Insurance

Op. Income (58%)

Op. EPS (33%)

Op. ROE (25%)

Manufacturing

Cash Flow (60%)

EPS (40%)

EBIT / Op. Income (30%)

Oil and Gas

Strategic Goals (50%)

Cash Flow (30%)

EPS, EBIT/Op. Income, EBITDA, ROI / ROIC (each 20%)

Pharmaceuticals

Revenue (80%)

Pipeline / R&D (70%)

EPS (50%)

Retail

Revenue (64%)

Op. Income (36%)

EBIT (27%) Strategic Goals (27%)

Technology

Revenue (64%)

Cash Flow (55%)

Op. Income (45%)

Note: Percentages reflect the prevalence of companies disclosing the metric.

2017 Actual Bonus Payouts

Overall, the median CEO bonus payout for 2017 performance was 118% of target – an increase over the median payout for 2016 performance of 101%. Across the industries, median CEO bonus payouts were the highest in Health Care (140%), Oil and Gas (135%), Technology (129%), and Consumer Goods (126%). None of the ten industries had a median bonus payout of less than 100% of target. Compared to bonuses paid for 2016 performance, the Retail industry showed the greatest increase in payout, year-over-year.

Median CEO bonus payouts for 2017 compared to 2016

Industry

CEO Bonus Payouts as a Percentage of Target

75th Percentile

Median

25th Percentile

2017

2016

2017

2016

2017

2016

Automotive

179%

160%

125%

109%

106%

76%

Consumer Goods

139%

149%

126%

123%

84%

109%

Financial Services

120%

98%

107%

86%

85%

81%

Health Care

146%

129%

140%

106%

71%

86%

Insurance

170%

133%

111%

100%

88%

84%

Manufacturing

144%

116%

125%

99%

120%

85%

Oil and Gas

177%

n/a

135%

n/a

89%

n/a

Pharmaceutical

139%

145%

113%

125%

105%

117%

Retail

162%

98%

113%

57%

83%

38%

Technology

140%

118%

129%

100%

95%

94%

Total Sample

152%

131%

118%

101%

90%

85%

Note: Most companies in the Financial Services industry do not disclose a target bonus for the CEO. For these companies, three-year average actual bonus was used as a substitute for target.

Long-Term Incentives Long-term Incentive Vehicle Prevalence

Most companies (84%) use a portfolio approach to long-term incentives based on a combination of long-term vehicles, such as stock options, restricted stock (or RSUs) and/or performance-based plans. Fifty-three percent of the companies in the study use two long-term incentive vehicles. These companies grant a combination of either a long-term performance plan and stock options (55%) or a long-term performance plan and restricted stock/RSUs (45%).

The next most common approach is to use three vehicles (31% of companies), and the least common approach is to use only one vehicle (16% of companies). Among companies using one vehicle, over 75% use a long-term performance plan.

82% 75% 54% 96% 61% 58% 0% 20% 40% 60% 80% 100% 120% Performance-Based Stock Options Time-Based RS Prevalance of Vehicle Long-Term Incentive Vehicle Prevalance 2011 2017

Since 2011, the percentage of companies using stock options declined by 14 percentage points to 61%, while the prevalence of time-based restricted stock/units has remained relatively flat. The bulk of the decline in stock options has transitioned to performance-based awards over time.

1 Vehicle (n=17) 2 Vehicles (n=57) 3 Vehicles (n=34) 16% 53% 31% Number of LTI Vehicles

LTI Award Mix

While 61% of companies still utilize stock options, its emphasis in the overall CEO long-term incentive mix has declined significantly with the corresponding increase in performance-based long-term incentives.

34% 20% 20% 19% 46% 61% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2011 2017 CEO Average Long-Term Incentive Vehicle Mix Stock Options Time-Based RS Performance-Based

Restricted Stock / Units (RS/RSU)

The majority of companies use ratable vesting over a period of three years for time-based RS/RSU awards. Approximately one-quarter of companies require a vesting schedule of four years or more.

Vesting Approach

Vesting (Years)

Ratable (n=43)

Cliff (n=24)

3 (n=49)

4 (n=11)

> 4 (n=7)

64%

36%

74%

16%

10%

3 Years (n=49) 4 Years (n=11) >4 Years (n=7) 64% 36% Vesting Approach Ratable (n=43) Cliff (n=24) 16% 10% 74% Vesting (Years)

Stock Options

Most companies use a three-year ratable vesting schedule for stock options with a 10-year term.

Vesting Approach

Vesting (Years)

Term (Years)

Ratable

(n=54)

Perf-Based

(n=2)

Cliff

(n=9)

3

(n=44)

4

(n=16)

> 4

(n=5)

10

(n=58)

< 10

(n=7)

83%

3%(1)

14%

68%

24%

8%

89%

11%

(1) Both companies awarding performance-vested stock options utilize stock price performance as the performance metric, one based on absolute stock price and the other based on relative TSR versus the S&P 500.

3 Years (n=44) 4 Years (n=16) >4 Years (n=5) Vesting Approach Ratable (n=54) Perf-Based (n=2) Cliff (n=9) 68% 24% 8% Vesting (Years) 3% 83% 14%

Performance-Based Awards

Among companies that grant performance-based awards with upside and downside leverage, 85% of companies have a threshold payout of 25% to 50% of target. At maximum, the most common payout opportunity is 200% of target. Five percent of companies provide payout opportunities greater than 250% of target.

Threshold Payout as a % of Target (n=68)

Range

% of Cos.

< 25%

13%

> 25% to < 50%

38%

50%

47%

> 50% to < 100%

2%

Maximum Payout as a % of Target (n=99)

Range

% of Cos.

100%

2%

> 100 to < 200%

35%

200%

58%

> 200% to < 250%

0%

250% or more

5%

Performance Metrics

Among companies in our study, TSR is the most prevalent performance metric in long-term performance plans and is used by 58% of companies with performance-based awards. Most companies (97%) measure TSR on a relative basis. Among companies that report using TSR, 30% use it as a modifier. In general, TSR is viewed as a shareholder friendly design feature. It also provides a credible way for companies to measure multi-year success, while avoiding the challenges of setting multi-year financial or operational goals.

TSR, however, is an outcome and not a driver of longer-term company success. Relative TSR can also be heavily influenced by a company’s position in the performance cycle. Consequently, most companies (89%) that use TSR as a metric use it in connection with another metric—most commonly, a return metric or EPS.

Return measures are the second most prevalent (53% of companies) type of performance metric, followed by EPS (29%) and Revenue (23%). Companies use these metrics – often in combination – in long-term performance plans to support operational efficiency and/or profitable growth.

When selecting specific performance metrics or modifiers, if any, companies should consider those yardsticks that best support long-term value creation in their industry and align executives’ interests with those of shareholders.

Similar to annual incentive plans, companies tend to use multiple metrics to create balance in their long-term performance plans.

19% 38% 43% Number of Performance Metrics 1 Metric (n=20) 2 Metrics (n=40) 3 Metrics (n=45)

Performance Measurement – Absolute Vs. Relative

Among the companies in our study, 50% use a combination of absolute and relative performance goals in their long-term performance plans. This approach motivates executives to achieve the company’s internal financial goals, while also balancing results relative to comparable companies with similar economic influences. When goals are relative, the goal setting process is substantially simplified.

For the companies utilizing a combination of absolute and relative performance goals in their long-term performance plans, when relative TSR is used, the most common additional measures are EPS, ROI/ROIC, and Revenue. These additional measures are most often measured on an absolute basis.

36% 41% 34% 24% 14% 45% 80% 58% 53% 29% 23% 18% 67% 84% Total ShareholderReturn (*) Return Measures EPS Revenue Cash Flow Relative Metrics Absolute Metrics 2011 (n = 94) 2017 (n = 105)

Note: Percentages add to greater than 100% due to multiple responses disclosed by many of the companies.Return measures category is comprised of the following metrics: ROE, ROI, ROIC, and ROA. (*) Approximately 30% of these companies use TSR as an award modifier.

Performance Measurement Period

Among companies that use a long-term performance plan (stock/units or cash), 97% have at least one plan with at least a three-year performance measurement period. Only three companies disclosed having a plan with a shorter measurement period.

Perquisites

The percentage of companies in our research providing perquisites to their CEO increased from 82% in 2013 to 87% in 2017. The percentage of companies providing perquisites to CFOs was 71% in 2017.

The four most common CEO perquisites in our analysis were: personal use of corporate aircraft (63%), personal security (34%), automobile allowance (31%) and financial planning (29%).

55% 29% 30% 24% 56% 29% 31% 31% 24% 62% 63% 33% 34% 32% 29% 29% 58% 30% 30% 27% 0% 10% 20% 30% 40% 50% 60% 70% Personal Use of Aircraft Personal Security Automobile Allowance Financial Planning CEO Perquisite Prevalance 2013 2014 2015 2016 2017

The median total value of perquisites delivered to the CEO and CFO has been relatively flat in recent years. Over the past five years, the median total value of CEO perquisites has ranged from $115,000 to $143,000. Over the same period, CFO total perquisites has ranged from $23,000 to $26,000.

Median CEO and CFO Perquisites Value ($000s) 2013 2014 2015 2016 2017 $125 $25 $143 $25 $24 $123 $26 $122 $115 $23 $0 $20 $40 $60 $80 $100 $120 $140 $160 CEO CFO

Shareholder Friendly Provisions

Stock ownership guidelines (SOG), hedging, pledging, and clawback policies are very common in publicly traded companies. These policies have grown in popularity due to the influence of legislation, proxy advisor firms, and shareholder scrutiny.

Stock Ownership Guideline

Hedging

Pledging

Clawback

95%

96%

86%

97%

In addition to stock ownership guidelines, many companies, particularly larger companies, have instituted stock holding policies. Of the 110 companies studied, 54% require executives to hold shares until the stock ownership guideline requirement is met.

A smaller number of companies (24%) maintain stock holding policies that are independent of stock ownership guidelines or that apply even after the guideline requirement has been achieved. These policies require executives to hold net shares received from equity awards for a period of time ranging from one year to retirement.

Holding Requirement Until SOG is Met

Holding Requirement Separate from or After SOG is Met

Holding Period for Separate/Post-SOG Requirements (n=26)

1 Year

5 Years

Until

Retirement

54%

24%

69%

4%

27%


For questions or more information, please contact:

Melissa Burek Partner
melissa.burek@capartners.com 212-921-9354

Lauren Peek Principal
lauren.peek@capartners.com 212-921-9374

Bryan Roberts Senior Associate
bryan.roberts@capartners.com 713-559-2716

Michael Bonner Senior Associate
michael.bonner@capartners.com 646-486-9744

Companies use annual bonuses as a tool to reward executives for achieving short-term financial and strategic goals. Setting appropriate annual performance goals is essential to establishing a link between pay and performance. Goals should achieve a balance between rigor and attainability to motivate and reward executives for driving company performance and creating returns for shareholders.

Key Takeaways:

  • Based on our analysis of actual incentive payouts over the past 6 years, the degree of difficulty, or “stretch”, embedded in annual performance goals translates to:
    • A 95% chance of achieving at least Threshold performance
    • A 75% chance of achieving at least Target performance
    • A 15% chance of achieving Maximum performance
  • This pattern indicates that target performance goals are challenging, but attainable, and maximum goals are achievable through highly superior performance
  • The majority of companies use two or more metrics when assessing annual performance
  • Annual incentive payouts have been directionally linked with earnings growth over the past 6 years

Summary of Findings

Plan Design

For the purposes of this study, we categorized annual incentive plans as either goal attainment or discretionary. Companies with goal attainment plans define and disclose threshold, target and maximum performance goals and corresponding payout opportunities. Alternatively, companies with discretionary plans do not define the relationship between a particular level of performance and the corresponding payout. Discretionary programs provide committees with the opportunity to determine payouts based on a retrospective review of performance results.

Annual Incentive Plan Type

Industry

Sample Size

Goal Attainment

Discretionary

Auto

n= 8

100%

0%

Consumer Discretionary

n= 10

90%

10%

Consumer Staples

n= 12

67%

33%

Financial Services

n= 12

17%

83%

Healthcare

n= 9

89%

11%

Industrials

n= 14

71%

29%

Insurance

n= 12

67%

33%

IT

n= 12

83%

17%

Pharma

n= 10

80%

20%

Total

72%

28%

Consistent with the findings from our study conducted in 2014, 72% of sample companies have goal attainment plans. Our study focuses on these companies.

Performance Metrics

Most companies (61%) use 3 or more metrics to determine bonus payouts. This reflects a shift from 2014, where 48% of companies used 3 or more metrics. Companies annually review metrics to ensure that they align with the business strategy.

Many companies use financial metrics such as revenue and profitability, which are indicators of market share growth and stock price performance. Some bonus plans also include strategic metrics, which incentivize executives to achieve goals that may contribute to long-term success, but may not be captured by short-term financial performance. Companies in the pharmaceutical industry often use strategic goals, such as pipeline development. Similarly, companies with large manufacturing operations often use quality control metrics.

 

# of Metrics Used in Goal Attainment Plan

 

Industry

1 Metric

2 Metrics

3 Metrics

4+ Metrics

Auto

13%

13%

25%

50%

Consumer Discretionary

11%

44%

45%

0%

Consumer Staples

0%

37%

38%

25%

Financial Services

0%

50%

50%

0%

Healthcare

0%

38%

12%

50%

Industrials

20%

40%

20%

20%

Insurance

37%

13%

25%

25%

IT

10%

30%

40%

20%

Pharma

0%

0%

63%

37%

Total

11%

28%

34%

27%

Pay and Performance Scales

Compensation committees annually approve threshold, target, and maximum performance goals, and corresponding payout opportunities, for each metric in the incentive plan. Target performance goals are typically set in line with the company’s internal business plan. Executives most often earn 50% of their target bonus opportunity for achieving threshold performance and 200% for achieving maximum performance. Actual payouts are often interpolated between threshold and target and target and maximum.

Annual Incentive Plan Payouts Relative to Goals

All Companies

Based on CAP’s analysis, companies paid annual bonuses 95% of the time. Payouts for the total sample are distributed as indicated in the following charts:

This payout distribution indicates that committees set annual performance goals with a degree of difficulty or “stretch” such that executives have:

  • A 95% chance of achieving at least Threshold performance
  • A 75% chance of achieving at least Target performance
  • A 15% chance of achieving Maximum performance

From 2010-2015, no more than 10% of companies failed to reach threshold performance in any given year. By comparison, in both 2008 and 2009, which were challenging years, approximately 15% of companies failed to reach threshold performance goals.

When looking back over 8 years (2008-2015), companies achieved at least threshold and target performance with slightly less frequency. Based on CAP’s analysis of this 8-year period, executives have:

  • A 90% chance of achieving at least Threshold performance
  • A 70% chance of achieving at least Target performance
  • A 15% chance of achieving Maximum performance

By Industry

Pharmaceutical and healthcare companies have paid at or above target more frequently than companies in any other industry over the past 6 years. Both industries have experienced significant growth over the period in part due to consolidation. The companies in the IT, Consumer Discretionary and Consumer Staples industries tend to pay below target at a higher rate. Average payouts for each industry are distributed as indicated in the following chart:

Relative to Performance

CAP reviewed the relationship between annual incentive payouts and company performance with respect to three metrics: revenue growth, earnings per share (EPS) growth and earnings before interest and taxes (EBIT) growth. While payouts were generally aligned with revenue and EPS growth, they most closely tracked with EBIT growth over the period studied (2010-2015). Companies may seek to align bonus payouts with operating measures, such as EBIT, as they capture an executive’s ability to control costs and improve operational efficiency.

The chart below depicts the relationship between median revenue, EPS, and EBIT growth and target and above annual incentive payouts among the companies studied.

Conclusion

In the first quarter of 2017, committees will certify the results and payouts for the fiscal 2016 bonus cycle and approve performance targets for fiscal 2017. Given the uncertain economic outlook following the 2016 presidential election, establishing performance targets for 2017 may be more challenging than usual. Companies may choose to use a range of performance from threshold to maximum to build flexibility into their plans given the unpredictable environment. Our study of annual bonus payouts over the past 6-8 years supports setting goals such that the degree of difficulty, or “stretch”, embedded in performance goals translates to:

  • A 90-95% chance of achieving at least Threshold performance
  • A 70-75% chance of achieving at least Target performance
  • A 15% chance of achieving Maximum performance.

Companies should continue to set target performance goals that are challenging, but attainable and maximum goals that are achievable through outperformance of internal and external expectations – therefore, establishing a bonus plan that is attractive to executives and responsible to shareholders.

Methodology

CAP’s study consisted of 100 companies from 9 industries, selected to provide a broad representation of market practice across large U.S. public companies. The revenue size of the companies in our sample ranges from $18 billion at the 25th percentile to $70 billion at the 75th percentile.

CAP analyzed the annual incentive plan payouts of the companies in the sample over the past 6-8 years to determine the distribution of incentive payments and the frequency with which executives typically achieve target payouts. In this analysis, CAP categorized actual bonus payments (as a percent of target) into one of six categories based on the following payout ranges:

Payout Category

Payout Range

No Payout

0%

Threshold

Up to 5% above Threshold

Threshold – Target

5% above Threshold to 5% below Target

Target

+/- 5% of Target

Target – Max

5% above Target to 5% below Max

Max

5% below Max to Max

The CAP 100 Company Research consists of 100 companies from 9 industries, selected to provide a broad representation of market practice among large U.S. public companies. In this report, CAP reviewed Pay Strategies, Annual Incentives, Long-Term Incentives, Perquisites, and Shareholder Friendly Provisions of these companies in order to gauge general market practices and trends.

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The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) directed the SEC to enact rules that require disclosure in the annual proxy statement of the ratio of Chief Executive Officer (CEO) compensation to that of the median employee, including the absolute value for each input that goes into the ratio calculation. More than five years later, final pay ratio rules have been released by the SEC. These rules will go into effect requiring companies to provide disclosure of their pay ratios for their first fiscal year beginning on or after Jan. 1, 2017.

While many companies are preparing for the new pay ratio disclosure requirements from the SEC, ratios of CEO pay to other NEOs are also something companies should pay close attention to. Committees can use these ratios as a starting point to assess issues such as retention, talent development, and succession planning. A high ratio can be an indicator that the CEO is potentially carrying too much of the company, a disconnect exists between the pay practices for the CEO vs. other senior leaders, or that there is no succession plan in place. Having healthy internal equity with appropriate ratios of pay for leadership, and an eye on general market norms, is an important factor in talent acquisition and retention.

This CAPflash focuses on three NEO pay ratio calculations:

  • CEO versus Chief Operating Officer (COO);
  • CEO versus Chief Financial Officer (CFO); and
  • CEO versus General Counsel (GC).

In this study, we provide market practice among S&P 500 companies, as well as the policies of proxy advisory firms, ISS and Glass-Lewis. In our analysis, we use the following target pay elements per proxy disclosure: disclosed base salary, target annual incentive, and target/grant date value of LTI awards.

Please note that the ratios used in this analysis are calculated from proxy disclosure. Therefore, if a COO or GC is not among the top 5 highest paid, as required in proxy disclosure, they are not included in the analysis—CFO pay disclosure is required.

What does our research show?

To evaluate market norms, Compensation Advisory Partners (“CAP”) conducted an analysis of senior executive target pay ratios among S&P 500 companies during the most recent three fiscal years (as of August 22, 2016).

  • At median, CEO pay was 2.2x the COO; i.e., for every $1.00 paid to the COO, the CEO was paid approximately $2.20
  • At median, CEO pay was 3.0x the CFO; i.e., for every $1.00 paid to the CFO, the CEO was paid approximately $3.00
  • At median, CEO pay was 4.0x the GC; i.e., for every $1.00 paid to the GC, the CEO was paid approximately $4.00

CAP also analyzed the S&P 500 senior executive pay ratios by industry.

  • For the CEO vs. COO ratio, the Utilities sector had the highest ratio of 3.0x at median, while Energy had the lowest ratio of 1.9x at median
  • For the CEO vs. CFO ratio, the Materials sector had the highest ratio of 3.5x at median, while Telecommunication Services had the lowest ratio of 2.2x, at median
  • For the CEO vs. GC ratio, the Consumer Discretionary sector had the highest ratio of 5.2x at median, while Consumer staples had the lowest ratio of 3.6x, at median

Note: Telecommunication Services was not included because the sample was too small.

Note: Telecommunication Services was not included because the sample was too small.

How do ISS and Glass-Lewis use pay ratios?

Both proxy advisory firms include senior executive pay ratios in their annual proxy analyses.

  • ISS includes the ratio of CEO pay versus the second highest paid active NEO, as well as the ratio of CEO pay versus the average of the other active NEOs. “Pay” includes all elements from the Summary Compensation Table; however, the grant-date value of stock options is updated to reflect ISS’ methodology which differs from accounting rules
  • Glass-Lewis includes the ratio of CEO pay versus the average of other NEOs during each of the past three years. “Pay” includes select elements from the Summary Compensation Table: Salary, Bonus, Non-Equity Incentive Plan, Stock Awards, and Option Awards

ISS also uses pay ratio as one of the inputs to the Compensation score it assigns companies in its QuickScore 3.0 tool, which is meant to influence investment decisions through an assessment of risk factors. The ratio of CEO pay versus the second highest paid active NEO is included in QuickScore 3.0.

When do proxy advisors perceive there to be a possible issue?

To our knowledge, these ratios have not been used by ISS or Glass-Lewis to justify an Against Say on Pay vote recommendation. However, large pay discrepancies can reinforce other negative assessments. In general, comments from ISS and Glass-Lewis are likely when the CEO to NEO ratio exceeds 4x. Ratios exceed 4x at 5-10% of S&P companies, depending on which ratio is used (see ISS and Glass-Lewis definitions above). Ratios rising to 5-6x, or greater, will receive more strongly worded commentary.

Conclusion

Since companies are very different in their organizational and operational structures, we believe that there is limited utility in the CEO pay ratio disclosure that will be required by the SEC under Dodd-Frank. However, looking at the ratios of leadership pay at companies in the same business sector and/or of the same size, can provide important information and insights. It is worthwhile for compensation committees to track this information internally and on a relative basis. Such information can be used as an input in the pay benchmarking process and as a barometer of healthy succession planning, as well as contributing to effective talent acquisition and retention.

Each year CAP analyzes non-employee director compensation programs among the 100 largest companies. We believe these companies provide insight into where the market will be going in terms of practices. Below is a summary of trends – for pay levels and pay practices – based on 2016 proxy filings.

Key CAP Findings

Board Compensation. pay levels went up

  • Total Fees. Increased 6 percent (median is $282K, versus $265K in prior year), which is the biggest single year increase we have seen in more than 4 years, though still within historic norms
  • Retainers. Large companies rely on annual retainers (cash and equity) to compensate directors. Pay programs are typically simple and viewed more as an “advisory fee” than an “attendance fee.”
  • Meeting fees. Provided by only 11 percent of companies (versus 12 percent in prior year). In general, companies have moved to a fixed retainer pay structure, with a component in cash and a component in equity. We support this approach as it simplifies administration and the need to define “what counts as a meeting.” However, companies may want to consider having a mechanism for paying meeting fees if the number of meetings in a single year far exceeds the norm. For example, if the number of meetings is well above historic norms (e.g., 12 meetings/year), companies could consider paying meeting fees above a specified number of meetings. Three companies in our dataset use this approach to meeting fees.
  • Equity. Full-value awards (shares/units) are most common. Only 8 percent of companies use stock options with, surprisingly, only one of these companies being in the traditional technology sector. 97 percent of companies denominate equity awards (stock or options) as a fixed value, versus a fixed number of shares, which is considered best practice as it manages the value each year. Approximately two-thirds of equity awards vest within 1 year of grant (either immediately or cliff vest after 1 year). Nearly 60 percent of equity awards settle at vest, with the remainder settling at or post retirement.
  • Pay Mix. On average, 61 percent equity-based versus 39 percent cash-based. Alignment with long-term shareholders is reinforced by delivering a majority of compensation in equity.

Committee Member Compensation. little/no change

  • Overall Prevalence. Only 48% of companies paid committee-specific member fees, relying on board-level compensation to recognize committee service, with the general expectation being that all independent directors contribute to committee service needs1.
  • Total Fees. Of the companies that pay committee member compensation, the median is $16.8K.

Committee Chair Compensation. little/no change

  • Overall Prevalence. Approximately 90 percent of companies provide additional compensation to committee Chairs, typically through an additional retainer and not meeting fees, to recognize additional time requirements, responsibilities, and reputational risk1.
  • Fees. At median, $20K in additional compensation (vs. members) was provided to Audit and Compensation Committee Chairs, and $15K additional to Nominating/Governance Committee Chairs.

Independent Board Leader Compensation. little/no change

  • Non-Exec Chair. Additional compensation is provided by all companies with this role, $225K at median. As a multiple of total Board Compensation, total Board Chair pay is 1.9x a standard Board member, at median.
  • Lead Director. Additional compensation – $30K, at median – is provided by nearly all companies with this role3. The differential in pay versus non-executive Chairs is in line with typical differences in responsibilities. 75th percentile additional compensation was $50K, up from $40K last year and up from $35K two years ago.

Pay Limits. prevalence of limits went up

  • There were 17 companies in our data set that amended an equity plan this year; 2 of these companies already had a shareholder approved limit in place for director compensation. Among the remaining 15 companies, 9 of them (60 percent) implemented a new shareholder approved limit for director compensation.
  • In total, 39 percent of the largest 100 companies now have such limits, up from 27 percent in prior year.
  • Limits range from $250K to $3.6 million, and were $760K at median. Among companies that denominate the limit in shares, the median is $1.05M, while the median for the companies with value-based limits is $525K.
  • Limits typically apply to just equity-based compensation; however, some companies have applied the limits to both cash and equity-based compensation (i.e., total pay) and we anticipate the prevalence of this practice will increase further. Other companies exclude initial at-election equity awards, committee Chair pay, and/or additional pay for Board leadership roles from the limit.
  • The limits are largely due to advancement of litigation where the issue has been that directors approve their own annual compensation and are therefore inherently conflicted. Companies have a stronger legal defense – protecting them under the business judgement rule – by having “meaningful limits” approved by shareholders on the maximum award that could be granted to a director. The “business judgment rule” is judicial presumption that directors acted “on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.” An action protected by the business judgment rule will not be second-guessed by the courts. There is a chance that the business judgement rule can be called into question without a meaningful limit. When the business judgment rule does not protect directors’ awards of compensation to themselves, the awards are subject to heightened scrutiny under the “entire fairness test” under which both the process and the amount of the compensation must be found to be entirely fair to the company.

Appendix

Total Board Compensation ($000s)

Equity Compensation

Equity Vehicle

2013

2014

2015

Full-Value Equity (Shares/Units)

95%

96%

92%

Stock Options

2%

1%

1%

Both

3%

3%

7%

Award Denomination

2013

2014

2015

Fixed Valued

88%

90%

92%

Fixed Shares

8%

6%

3%

Both

4%

4%

5%

Additional Compensation for Independent Board Leaders ($000s)

Lead/Presiding Directors

Non-Executive Chairs

Total Company Cost for Board Service ($000s)


1 Audit, Compensation and/or Nominating and Governance committees.

2 Excludes controlled companies. Also excludes instances where Lead Director role is assumed by Chair of Nominating and Governance Committee, who receives compensation for the role.

Annually, Compensation Advisory Partners (CAP) evaluates pay levels for Chief Financial Officers (CFOs) and Chief Executive Officers (CEOs). This year, the analysis is based on a sample of 100 companies with median revenues of $13 billion. For more information on criteria used to develop the sample of companies, please see Appendix.

Highlights

  • Annual salary increases are increasing in prevalence for the third year in a row among CEOs and CFOs, with median increases of 2.5% and 3.9% respectively
  • Similar to prior years, salary increases are provided much more frequently to CFOs than to CEOs, with over three quarters of CFOs studied receiving a salary increase in 2015
  • The 2015 median increases in actual total direct compensation (i.e., cash plus equity) for both CEOs and CFOs were modest, 2.2% and 1.4% respectively
  • At median, there was no growth in actual bonuses, partly reflective of a weaker performance year in 2015 vs 2014
  • Median target bonus opportunities were flat for CEOs over the past 3 years; for CFOs median target bonuses were flat in 2015 after an increase from 2013 to 2014
  • Growth in long-term incentive opportunities at median was in the mid-single digits for both positions
  • CFO total compensation on an absolute basis approximates one-third of CEO total compensation, consistent with our findings in prior years
  • Long-term incentive program structure has remained consistent over the past few years; performance-based equity continues to represent the largest component of LTI for CEOs and CFOs

Study Results

Salaries

In the last three years, we have seen a steady growth in the number of CEOs and CFOs receiving salary increases in a given year. Only 48% and 69% of CEOs and CFOs, respectively, received increases for the 2012-2013 period compared with 58% of CEOs and 77% of CFOs for the 2014-2015 period. Median 2015 salary increases were 3.9% for CFOs and 2.5% for CEOs.

% of Executives Receiving Salary Increases

2013 – 2014

2014 – 2015

No Increase

Receiving Increase

No Increase

Receiving Increase

CEO

49%

51%

42%

58%

CFO

28%

72%

23%

77%

2015 Salary Increases

Actual Pay Levels

Based on our findings, the median rate of increase in actual total direct compensation levels for both CEOs and CFOs was approximately 2% for 2015. The median increases over the last two years ranged between 3% and 5%. The lower increases in total compensation for 2014-2015 are partially a result of no increase in bonuses, at median, and only slightly higher single digit increase in long-term incentives.

Median Percentage Change in Pay Components

2013 – 2014

2014 – 2015

Pay Components

CEO

CFO

CEO

CFO

Salary

0.3%

3.0%

2.5%

3.9%

Actual Bonus

4.3%

7.8%

0.0%

-0.1%

Long-Term Incentives

3.7%

4.2%

6.8%

7.6%

Actual Total Direct Compensation

3.2%

5.2%

2.2%

1.4%

As seen in the table above, the median 2015 increases by pay component were similar for both CFOs and CEOs. Similar to actual bonuses, median target bonuses remained flat for both CFOs (100% of base salary) and CEOs (150% of base salary).

Target Bonus as % of Salary

2014

2015

CEO

CFO

CEO

CFO

75th Percentile

165%

105%

180%

120%

Median

150%

100%

150%

100%

25th Percentile

125%

80%

130%

80%

Median Salary Increase by Industry

Median Actual Total Compensation Increase/Decrease by Industry

Median salary increases in salary are generally aligned for CEOs and CFOs within each specific industry, except for the Consumer Discretionary and Materials industries. Among the Consumer Discretionary industry, the median CEO increase was 2.1% compared to the CFO median increase of 7.2%. In the Materials industry, the median CEO increase was 4.4% compared to the CFO median increase of 8.7%. The Energy industry increases were 0% for both CFOs and CEOs. The salary freeze in the industry comes as no surprise given that some companies in the industry implemented salary freezes for 2015 after oil prices collapsed.

Differences by industry were more pronounced when looking at actual total direct compensation. There were more decreases in CEO or CFO total actual compensation in 2015 compared to 2014, primarily driven by weaker company performance and the annual incentive award paid as a result of performance. The Energy industry was the single industry where both CFOs and CEOs experienced similar declines in compensation, at median. Some of the largest increases in compensation levels were observed in Consumer Discretionary, Healthcare and Materials.

Target Pay Mix

The structure of the overall pay program (salary, bonus, LTI) has remained largely unchanged since 2011. CEOs continue to receive less in the form of salary and more in variable pay components, especially LTI, than CFOs.

Long-Term Incentive (LTI) Vehicle Prevalence and Mix

We have seen very little change in the type of vehicles used to deliver LTI awards. Overall LTI mix also remains similar to the past several years. The majority of companies continue to use two different vehicles to deliver long-term incentives to CEOs/CFOs with approximately a quarter of companies studied using all 3 equity vehicles (stock options, time-based stock awards, and awards under a performance plan)

Performance plans account for roughly 50% of LTI awards on average. The other half of LTI is delivered almost equally between stock options and time-vested restricted stock awards. The overall weighting of performance-based awards (performance plans and stock options) for both CEOs and CFOs continues to range between 75% – 80%.

LTI Mix

2014

2015

CEO

CFO

CEO

CFO

Stock Options

26%

25%

24%

23%

Time Vested Restricted Stock

21%

26%

20%

25%

Performance Plans

53%

49%

56%

52%

Conclusion

2015 was not as strong a performance year as 2014. Median revenue growth was -1% (vs 6% in 2014), net income growth was -1% (vs 9% in 2014) and total shareholder return was -2% (vs 16% in 2014). Overall total pay increases were also smaller than in 2014, which we believe were directionally aligned with performance. While salary and long-term incentive increases for CFOs were slightly higher in 2015, actual bonus amounts were flat. This pattern was similar for CEOs in the study.

We expect overall pay mix to continue to emphasize the variable, at-risk components of pay. We also expect the current approach to delivering long-term incentives, with an emphasis on performance-based LTI plans to continue. In this era of increased scrutiny and Say on Pay, we anticipate that aligning pay outcomes with company performance will continue to be an imperative for companies and Boards.

APPENDIX

Sample Screening Methodology

Based on the screening criteria below, we arrived at a sample of 100 public companies with median 2015 revenue of $13B.

Revenue

At least $5B in revenue for fiscal year 2015

Fiscal year-end

Fiscal year-end between 9/1/2015 and 1/1/2016

Proxy Statement Filing Date

Proxy statement filed before 3/31/2016

Tenure

No change in CEO and CFO incumbents in the past three years


Overall Findings

  • Performance: 2015 performance (based on Revenue growth, Pre-tax Income growth, EPS growth and 1-year Total Shareholder Return or TSR) was weaker than 2014 performance.
  • CEO Pay: Median CEO pay was up 13% from 2014, driven by significant increases in the grant date value of long-term incentives (LTI) which are typically granted during the beginning of the fiscal year.
  • Annual Incentive Payout: At median, annual incentive payouts (as a percentage of target) were lower in 2015 than the prior year. Additionally, there was more variability in payout around target compared to 2014 demonstrating a directional alignment between pay and performance.
  • LTI Payout: Performance share plans paid out at target for the 2013-2015 performance period despite strong median 3-year cumulative TSR performance of 56%.
  • Disclosure: Companies generally did not make wholesale changes to their proxy statements. Some enhanced their disclosure through the use of charts and graphs to make the proxy statement a communications document for shareholders.

2015 PERFORMANCE

2015 was a year that included an increase in the value of the U.S. dollar, volatility in foreign currency exchange rates and a slowdown in economic growth overseas (particularly in China). These factors contributed to 2015 performance being weaker than 2014 performance. CAP reviewed Revenue growth, Pre-tax Income growth, EPS growth and TSR performance for the Early Filers and the S&P 500. For the measures reviewed, 2015 performance was generally flat (0 – 3% growth) compared to the strong performance of 2014.

Financial Metric

2014 Median 1-year Performance

2015 Median 1-year Performance

S&P 500

Early Filers

S&P 500

Early Filers

Revenue Growth

5.6%

5.7%

0.8%

2.4%

Pre-Tax Income Growth

8.6%

6.4%

0.2%

1.2%

EPS Growth

10.6%

10.4%

2.6%

3.2%

TSR (1)

16.3%

14.1%

2.3%

0.3%

(1) TSR for the S&P 500 is as of September 30, 2014 and September 30, 2015. TSR for Early Filers is as of each company’s fiscal year end.

CEO TOTAL DIRECT COMPENSATION

Among Early Filers with CEOs in their role for at least two years (n=42), 2015 actual total direct compensation increased 13% over 2014 pay levels. 2015 annual incentive payouts were down 3% reflecting weaker financial performance compared to the prior year. LTI grants in 2015, however, were significantly higher than 2014. This finding is likely reflective of the timing of LTI grants (typically in the first quarter of the fiscal year) and companies likely providing larger grants in 2015 because of the strong performance in 2014. Consistent with the expected salary increases, 2015 base salary was 3% higher than 2014.

Compensation Element (n=42)

2014 Median

($000)

2015 Median

($000)

% Increase

Base Salary

$1,000

$1,031

3.1%

Actual Annual Incentive

$1,791

$1,731

-3.4%

Total Cash

$2,836

$2,663

-6.1%

Long-Term Incentive (LTI)

$5,468

$6,896

26.1%

Total Direct Compensation

$8,290

$9,399

13.4%

INCENTIVE COMPENSATION

Annual Incentive Plan Payout

As mentioned above, actual annual incentive payouts in 2015 were lower than 2014. At median, 2015 payouts were 101% of target vs. 2014 payouts which were 111% of target. At the 25th percentile, 2015 payouts were much lower (76%) than 2014 (99%) but were more in line with 2013 and 2012 payouts which is indicative of a return to more normalized distribution of payouts in 2015.

Summary Statistics

Annual Incentive Payout

as a % of Target

2012

2013

2014

2015

75th Percentile

130%

127%

135%

133%

Median

100%

95%

111%

101%

25th Percentile

72%

75%

99%

76%

As expected, performance was noticeably stronger for companies with an annual incentive payout that was at or above target. Conversely, performance for companies with a payout below target was weaker in 2015. These results are similar to 2014 performance, although TSR was stronger for companies with below target payout in 2014 (+7%) compared to 2015 (-11%).

Financial Metric

2014 Median 1-year Performance

2015 Median 1-year Performance (1)

Below target payout (n=15)

At or above target payout (n=35)

Below target payout (n=24)

At or above target payout (n=24)

Revenue Growth

3.6%

6.3%

-4.0%

7.0%

Pre-Tax Income Growth

-2.9%

12.7%

-7.2%

11.7%

EPS Growth

-3.4%

13.5%

-2.9%

13.9%

TSR (2)

7.2%

16.0%

-10.7%

12.6%

(1) Excludes 2 companies that had spin-offs during 2015.

(2) TSR for Early Filers is as of each company’s fiscal year end.

Overall, 50% of companies provided a payout at or above target in 2015 (consistent with 2013 and 2012) which is much lower than 2014 (70% of companies); as a result, there was more variability in payouts relative to target in 2015 than in 2014. Additionally, the number of companies providing a payout between 100 – 150% of target in 2015 is approximately half of what it was in 2014. Interestingly, nearly the same number of companies provided a payout of 150% and above in both 2014 and 2015. Finally, the number of companies not providing an annual incentive payout in 2015 increased (4 companies in 2015 vs. 1 company in 2014).

Long-Term Incentive Plan Payout

Three-year (2013 – 2015) performance was strong among Early Filers and the S&P 500. Cumulative Revenue growth was 11% (or 4% per year) for both Early Filers and the S&P 500. Cumulative EPS growth was very strong (21%) for the S&P 500 and more modest (11%) for the Early Filers. Overall, companies in both groups had significant stock price appreciation over the three-year period; 3-year cumulative TSR was 48% for the S&P 500 and 56% for the Early Filers.

Financial Metric

Median 3-year Cumulative Performance

S&P 500

All Early Filers (1) (n=42)

Revenue Growth

10.9%

11.0%

Pre-Tax Income Growth

15.6%

12.1%

EPS Growth

21.3%

10.9%

TSR (2)

48.0%

55.7%

(1) Reflects only those companies with a performance share plan.

(2) TSR for the S&P 500 is as of September 30, 2015. TSR for Early Filers is as of each company’s fiscal year end.

Despite strong TSR performance over the three-year period, and even with 60% of companies using Relative TSR as a performance metric, median LTI payout was around target (98%). Median LTI payout for companies that use Relative TSR was slightly below target (95%); however, a majority of these companies (60%) use TSR in conjunction with other financial metrics.

Summary Statistics

LTI Payout as a % of Target

All Early Filers (n=42)

Early Filers with TSR as a Metric (n=26)

75th Percentile

128%

119%

Median

98%

95%

25th Percentile

54%

54%

PROXY STATEMENT DISCLOSURE CHANGES

Since Say on Pay was adopted in 2011, companies have incorporated many new features to make their proxy statement a communications document for shareholders by including a proxy summary, an executive summary in the CD&A and highlighting good governance practices, just to name a few. While Early Filers generally did not make wholesale changes to their proxy statement in 2016, some companies enhanced their disclosure with additional charts and graphs. Some examples include:

  • Deere & Co, which has annual incentive performance goals that can vary depending upon the company’s sales volume, added a graph to explain the performance goals, actual results and how each related to the actual sales volume achieved;
  • Jabil Circuit, Jacobs Engineering Group and TE Connectivity added a list of corporate governance best practices (i.e., “what we do and what we do not do”);
  • Starbucks added a picture describing their shareholder outreach process and topics discussed with shareholders.

We would expect that companies will have more significant changes to the proxy statement as more rules under Dodd-Frank (e.g., pay ratio and pay vs. performance) are finalized and implemented.

CONCLUSION

2015 was not as strong of a performance year as 2014. Given weaker 2015 performance, annual incentive payouts declined from 2014 levels resulting in a directional alignment between pay and performance. 2016 is already shaping up to be an interesting year given recent declines in stock price, currency fluctuations and overall uncertainty given the U.S. Presidential election. Many companies will be making their annual equity grants at depressed stock prices, so we may potentially see a year over year decline in LTI grant values particularly for those companies that grant awards based on a fixed number of shares. From an executive compensation perspective, we expect that the SEC will come out with final rules for the clawback, hedging and pay vs. performance in October 2016 which could have an impact on 2017 and 2018 disclosure.