The CAP 120 Company Research consists of companies from ten industries, selected to provide a broad representation of market practice among large U.S. public companies. In this report, CAP reviewed Annual Incentives, Long-Term Incentives, Perquisites, and Stock Ownership Guideline Requirement Provisions of these companies in order to gauge general market practices and trends.


Click here for our interactive tool for industry break-downs


Characteristics of the CAP 120 Company Research Sample

The CAP 120 Research Study consists of 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 $3 billion to $525 billion (median revenue of $34B) and are summarized in the following exhibits.

9%12%13%8%10%8%9%10%11%10%IndustriesAutomotiveConsumer GoodsFinancial ServicesHealth CareInsuranceManufacturingOil and GasPharmaceuticalRetailTechnology

Financial Summary ($M)

Cumulative Total Shareholder Return
Ending on 12/31/2019

Percentile

Revenue

Net Income

Assets

Market Cap

1-Year

3-Year

5-Year

75th

$72,813

$6,798

$204,353

$126,261

109%

90%

81%

Median

$33,950

$3,472

$61,855

$51,214

60%

59%

55%

25th

$17,748

$1,693

$28,975

$25,367

40%

40%

36%

Peer Group

Among companies in this year’s analysis, 98% disclose using a peer group for pay benchmarking purposes with the median number of companies in a peer group at 18. Only two companies did not disclose a pay benchmarking peer group.

Consistent with prior years, 36% of the companies reviewed have more than one peer group. Typically, one peer group is used for benchmarking within a specific industry, while the second peer group looks at the broader business sector or at general industry companies. Alternatively, the second peer group is used for relative measurement within the LTI plan.

Peer Group

% of companies with a
disclosed peer group

% of companies with more
than one peer group

Median # of companies
in peer group

98%

36%

18

Annual Incentive

Annual Incentive Plan Metrics

The use of multiple metrics to fund annual incentive plans has increased over time. Among the CAP 120 companies, 84% use two or more metrics. Only 7% of companies use a single metric, down from 14% in 2010, as companies try to balance overall plan funding. Annual incentive payouts based on multiple performance metrics ensures a broader view of company performance and mitigates risk within the program.

9%7%28%56%8%14%26%52%No Metrics1 Metric2 Metrics3+ MetricsNumber of Annual Incentive Metrics2019 (n=120)2010 (n=85)

Operating Income (including EBIT, EBITDA, and Pre-tax Income), Revenue, EPS, and Strategic/Non-Financial Objectives are the most common metrics used in annual incentive plans. Since 2010, the use of Revenue has been generally consistent while use of Operating Income and Cash Flow have increased by approximately 10 percentage points. Over the same period, use of EPS and Return Metrics has decreased (by 16 and 7 percentage points, respectively).

53%50%41%31%32%16%12%5%44%49%35%47%21%23%15%1%Op. Income/ EBIT / EBITDA /Pre-Tax IncomeRevenueStrategic /Non-FinancialEPS / Op. EPSCash FlowReturn MetricsNet IncomeOp. MarginAnnual Incentive Metric Prevalence2019 (n=109)2010 (n=78)

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: ROA, ROE Operating ROE, ROCE, ROI and ROIC.

More companies are incorporating non-financial measures in the annual incentive plan to incentivize accomplishments unique to a company’s strategy. Overall, 43% of companies in our study use strategic and other non-financial measures, with certain industries (e.g., Health Care, Oil and Gas, and Pharmaceuticals) having more of an emphasis on these measures. An emerging trend is to incorporate ESG (environmental, social and governance) metrics in the annual incentive program.

The chart below shows the three most prevalent metrics by industry in 2019:

Industry

Metrics

Metric #1

Metric #2

Metric #3

Automotive
(n=11)

Cash Flow (73%)

Op. Income / EBIT / EBITDA (64%)

Strategic / Non-Financial (55%)

Consumer Goods
(n=14)

Revenue (86%)

Op. Income / EBIT (57%)

EPS (43%)

Financial Services
(n=7)

EPS / Op. EPS (86%)

ROE / Op. ROE (57%)

Revenue (29%)

Strategic / Non-Financial (29%)

Health Care
(n=10)

Op. Income / Pre-Tax Income (70%)

Strategic / Non-Financial (60%)

EPS (40%)

Insurance
(n=12)

Op. Income (58%)

Op. EPS (33%)

Op. ROE (25%)

Manufacturing
(n=9)

Cash Flow (67%)

EPS (44%)

Revenue (33%)

Oil and Gas
(n=10)

Cash Flow (50%)

Op. Income / EBIT / EBITDA (40%)

Strategic / Non-Financial (40%)

EPS (30%)

Return Metrics (30%)

Pharmaceutical
(n=12)

Revenue (83%)

Pipeline / R&D (75%)

Strategic / Non-Financial (67%)

Retail
(n=12)

Op. Income / Pre-Tax Income (75%)

Revenue (67%)

Strategic / Non-Financial (58%)

Technology
(n=12)

Revenue (67%)

Op. Income / Pre-Tax Income (58%)

Cash Flow (42%)

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

Award Leverage

CAP reviewed proxy disclosures to understand how companies establish annual incentive payout ranges (i.e., threshold payout and maximum payout expressed as a percentage of the target award). 53% of companies in our study disclose a threshold annual incentive payout at a defined level other than zero. The most common threshold payout for these companies is 50% of target.

Most companies (89%) disclose a maximum annual incentive opportunity with 74% of these companies utilizing a 200% of target maximum. Only eight companies have a maximum payout above 200% of target with 300% being the highest.

Threshold Payout as a % of Target (n = 63)

Range

# of Cos.

% of Cos.

< 25%

13

21%

25% to < 50%

21

33%

50%

29

46%

Maximum Payout as a % of Target (n = 107)

Range

# of Cos.

% of Cos.

> 100% to < 150%

3

3%

150% to < 200%

17

15%

200%

79

74%

> 200% to < 250%

4

4%

250% or more

4

4%

Among four of the most common performance measures in our analysis, the payout leverage chart below demonstrates that the average range of performance goals and payouts varies by performance measure.

0%50%100%150%200%75%80%85%90%95%100%105%110%115%120%125%% of Target Bonus EarnedPerformance LevelPayout Leverage for the 4 Most Common MeasuresOp. Income / Pre-Tax Income / EBIT / EBITDARevenueEPS / Op. EPSCash FlowTHRESHOLDMAXIMUM

Long-Term Incentives

Long-Term Incentive Vehicle Prevalence

A vast majority of companies in our study (84%) use multiple long-term incentive vehicles for the most senior executives, an increase from 74% of companies in 2010. While the use of three long-term incentive vehicles has remained consistent, a noticeable shift to two vehicles from one has occurred since 2010.

Slightly more than half of the companies (55%) use two long-term incentive vehicles, typically delivered through a long-term performance plan and time-based restricted stock/units, followed by a long-term performance plan and stock options.

The next most common approach is to use three vehicles (29% of companies). A small percentage of companies in our study (16%) use only one vehicle and it is most typically delivered in the form of a long-term performance plan (89%).

16%55%29%2019 Number of LTI Vehicles1 Vehicle2 Vehicles3 Vehicles26%40%34%2010 Number of LTI Vehicles1 Vehicle2 Vehicles3 Vehicles

Performance-Based LTI awards for senior executives are used by almost all large cap companies (97%) while the use of stock options has declined to 53% of companies. This is a substantial change from our 2010 study when stock options were used by 67% of companies. The prevalence of time-based restricted stock/units has increased slightly from 54% to 60% over the same time period.

Long-Term Incentive Vehicle Prevalence97%53%60%71%67%54%Performance-BasedStock OptionsTime-Based RS2019 (n=120)2010 (n=85)

LTI Award Mix

Performance-Based LTI reflects the largest portion of the LTI mix for the CEO and has continued to increase over time. The weighting of stock options has fallen by 50% since 2011. Companies have shifted award value from stock options into performance-based LTI. The refusal of proxy advisors to acknowledge stock options as a performance-based vehicle has undoubtedly contributed to this decline. Meanwhile the emphasis on restricted stock/units has been consistent over the last 10 years representing the true retentive piece of LTI awards.

46%34%20%63%17%20%20112019CEO Average Long-Term Incentive Vehicle MixPerformance-Based LTIStock OptionsTime-Based RS/RSUs

Restricted Stock / Units (RS/RSU) and Stock Option Provisions

The majority of companies use ratable vesting over a period of three years for time-based RS/RSU awards. Approximately 30% of companies use a vesting schedule of four years or more.

66%31%3%Time-Based RS/RSUVesting ApproachRatableClifPerf-Based71%19%10%Time-Based RS/RSUVesting Years3 Years4 Years>4 Years

For stock options, most companies use 3-year ratable vesting with a 10-year term.

Stock Options

Vesting Approach

Vesting (Years)

Term (Years)

Ratable

Perf-Based

Cliff

3

4

> 4

10

< 10

83%

2%

15%

72%

25%

3%

92%

8%

Performance-Based Award Provisions

The payout curve for performance-based LTI awards with upside and downside leverage mirrors that of annual incentive awards; the most common threshold payout is 50% of target and the most common maximum payout is 200% of target. A larger number of companies (43% for long-term plans vs. 33% for annual incentive plans) disclose a threshold payout between 25% – 50% of the target award, and few LTI plans have award payouts of less than 25% of target (9% for LTI plans vs. 21% for AI plans).

Threshold Payout as a % of Target (n=79)

Range

# of Cos

% of Cos.

< 25%

7

9%

25% to < 50%

34

43%

50%

37

47%

> 50% to < 100%

1

1%

Maximum Payout as a % of Target (n=106)

Range

# of Cos

% of Cos.

100%

1

1%

> 100% to < 200%

30

28%

200%

70

66%

> 200% to < 250%

2

2%

250% or more

3

3%

Performance Metrics

Total Shareholder Return (TSR) continues to be the most highly used performance metric in long-term performance plans; 65% of companies use it as a measure in the performance-based LTI plan. Return metrics are the second most common measure (48% of companies) followed by EPS (31%) and Revenue (23%).

In CAP’s 2010 study, EPS was the most common measure followed by TSR. The rise in the use of TSR can be linked to the influence of proxy advisors who have relied on TSR as a proxy for measuring performance and pay outcomes. Although proxy advisors focus on TSR as a measure of performance, companies often use TSR in conjunction with financial measures for a more holistic view of company performance. In these cases, most companies weight TSR at 50% of the performance-based LTI and approximately 25% use it as an award modifier instead of a weighted metric.

The use of return measures has increased significantly from our 2010 study (48% in 2019 vs. 26% in 2010) as companies are increasingly aligning executive long-term pay with operational efficiency. Return metrics are also often favored by institutional shareholders who prefer the use of more than one measure within a program.

65%48%31%23%11%38%26%40%18%8%TotalShareholderReturnReturnMeasuresEPSRevenueCash FlowPerformance-Based LTI Metrics2019 (n = 114)2010 (n = 60)

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.

Performance Measurement – Absolute vs. Relative

A majority of companies in the study balance absolute financial performance goals with relative metrics. This balanced approach has increased substantially since 2010. Today, more than half (54%) of companies with performance-based LTI use both absolute and relative metrics which is a dramatic increase from just 12% of companies doing so in 2010. This increase is closely tied to the proliferation of relative TSR as a long-term metric.

In our most recent study, only 12% of companies rely only on relative performance metrics to determine payouts (down from 38% in 2010) and 34% of companies only use absolute metrics (down from 45% in 2010).

66%88%12%54%34%55%62%38%16%45%RelativeMetricsAbsoluteMetricsRelativeMetrics OnlyRelative andAbsolute MetricsAbsoluteMetrics OnlyPerformance-based LTI: Absolute vs. Relative Metrics2019 (n = 114)2010 (n = 60)

Perquisites

Most companies in our study (90%) provide perquisites to their CEO and slightly fewer companies (80%) also provide perquisites to their CFO. These findings are generally consistent with previous years.

Personal use of aircraft, personal security, financial planning, and automobile allowance continue to be the most common CEO perquisites. There is a slight shift in the prevalence of the four most common perquisites since 2014.

61%31%30%25%56%29%24%31%Personal Use of AircraftPersonal SecurityFinancial PlanningAutomobile AllowanceCEO Perquisites Prevalence20192014

The median value of perquisites delivered to the CEO in 2019 ($120,000) is about 15% lower than five years ago ($143,000). There was a 20% increase ($5,000) however, in the median perquisite value for the CFO in 2019 ($30,000) compared with 2014 ($25,000).

$120$30$143$25CEOCFOMedian CEO and CFO Perquisites Value ($000s)20192014

Stock Ownership Requirement Provisions

Stock ownership guidelines in publicly traded companies are a commonly used and favorably viewed form of good corporate governance. Almost all the CAP 120 companies (96%) have requirements in place for the named executive officers (NEOs). The median guideline (expressed as a multiple of base salary) is 6x for the CEO and 3x for the other NEOs.

Stock Ownership

Guideline

Median Multiple of Base Salary

CEO

CFO

Other NEOs

96%

6x

3x

3x

Many companies (58%) have a stock holding requirement for senior executives in addition to a stock ownership guideline. It continues to be less common for companies to have holding requirements independent of ownership guidelines or holding requirements that apply after achieving the ownership requirement. These holding policies require executives to hold net shares received from equity awards for periods ranging from one year (most common) to post-retirement. Although these are generally viewed as shareholder friendly, the prevalence has remained consistent over the past few years.

Holding Requirement Until SOG is Met

Holding Requirement Separate from or After SOG is Met

Holding Period for Separate/Post-SOG Requirements (n=27)

1 Year

2 Years

5 Years

Until Retirement

Post Retirement

58%

23%

48%

4%

4%

22%

22%


Click here for our interactive tool for industry break-downs


For questions or more information, please contact:

Melissa Burek
Partner
[email protected]
212-921-9354

Chris Earnest
Partner
[email protected]
713-559-2715

Lauren Peek
Principal
[email protected]
212-921-9374

Bryan Roberts
Senior Associate
[email protected]
713-559-2716

David Jenkins
Senior Associate
[email protected]
713-559-2717

The CAP 120 Company Research consists of companies from ten 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 Stock Ownership Guideline Requirement Provisions of these companies in order to gauge general market practices and trends.

Characteristics of the CAP 120 Company Research Sample

The CAP 120 Research Study consists of 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 $3 billion to $500 billion (median revenue of $32.7B) and are summarized in the following exhibits.

9%12%13%9%10%8%9%10%10%10%IndustriesAutomotiveConsumer GoodsFinancial ServicesHealth CareInsuranceManufacturingOil and GasPharmaceuticalRetailTechnology
Financial Summary ($M) Cumulative Total Shareholder Return Ending on 12/31/2018
Percentile Revenue Net Income Assets Market Cap 1-Year 3-Year 5-Year
75th $67,103 $6,804 $172,979 $99,181 4% 50% 73%
Median $32,716 $3,183 $61,495 $43,956 -12% 21% 33%
25th $18,762 $1,654 $25,487 $21,535 -23% -4% 1%

Pay Strategy

Among companies in CAP’s 120 Research, 97% disclose using a peer group for pay benchmarking purposes. The median number of companies in a peer group is 18.

Consistent with last year, approximately one-third (31%) of the companies with a peer group use more than one peer group. Companies with multiple peer groups either use two peer groups for pay benchmarking (e.g., an industry specific peer group and a general industry peer group) or use one peer group for pay benchmarking and another peer group for relative performance comparisons.

Peer Group (n = 116)
% 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
97% 31% 18

While use of a peer group is almost universal among large cap companies, many use a peer group as a reference point when setting pay and do not disclose targeting a specific pay position relative to market. Only half of the companies in our study disclose a target pay philosophy for total compensation. Of these companies, only 7% target total compensation above median.

Target Pay Philosophy (n = 56)
Element Base Bonus Cash Long-Term Incentives Total Compensation
% Disclosing 32% 22% 22% 24% 47%
% Target Below Median Pay 8%
% Target Median Pay 87% 96% 96% 97% 93%
% Target Above Median Pay 5% 4% 4% 3% 7%

Annual Incentive

Annual Incentive Plan Metrics

A majority of CAP 120 companies (90%) fund their annual incentive plans using two or more metrics. Only 10% of companies use 1 metric, reflecting a decrease from 2009, as companies try to balance overall plan funding. Use of multiple performance metrics allows for annual incentive payouts to be reflective of broader company performance.

10%35%55%18%25%57%1 Metric2 Metrics3+ MetricsNumber of Annual Incentive Metrics2018 (n=110)2009 (n=76)

Operating Income (including EBIT, Pre-tax Income and EBITDA), Revenue, EPS, and Cash Flow are the most common metrics used in annual incentive plans. Since our first study, the use of Operating Income and Revenue has been generally consistent. Over this period, the use of EPS, Return Metrics and Net Income has decreased (by 11, 10 and 6 percentage points, respectively).

47%45%41%36%31%15%10%5%46%47%35%47%n/a25%16%n/aOp. Income/EBIT / Pre-taxIncome / EBITDARevenueStrategic / Non-Financial GoalsEPSCash FlowReturn MeasuresNet IncomeOp. MarginAnnual Incentive Metric Prevalence2018 (n=110)2009 (n=76)

Note: In the chart above, n/a = not available. 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.

More companies are incorporating non-financial measures in the annual incentive plan as they are unique to a company’s strategy. Overall, approximately 40% of companies in our study use strategic and other non-financial measures, with certain industries (e.g., Health Care and Oil and Gas) having more of an emphasis on these measures. An emerging trend is to incorporate ESG (environmental, social and governance) metrics in the annual incentive program. Overall, 14 companies (12%) in our study disclosed such measures; environmental measures are most prevalent (8 companies) followed by diversity and inclusion (6 companies).

The chart below shows the three most common metrics by industry in 2018:

Industry Metrics
Metric #1 Metric #2 Metric #3
Automotive (n=11) Cash Flow (73%) Op. income / EBIT / EBITDA (64%) Revenue (36%)
Consumer Goods (n=14) Revenue (71%) EPS (57%) Op. income / EBIT (50%)
Financial Services (n=7) EPS (68%) Return Metrics (43%) Strategic Goals (43%)
Health Care (n=11) Strategic Goals (64%) Op. income / Pre-tax Income (55%) EPS (45%)
Insurance (n=12) Op. Income (58%) Op. EPS (33%) Op. ROE (25%)
Manufacturing (n=10) Cash Flow (60%) EPS (50%) Op. Income (20%)
Oil and Gas (n=11) Strategic Goals (64%) Op. Income / EBITDA (55%) ROIC (36%)
Pharmaceuticals (n=11) Revenue (73%) Pipeline / R&D (73%) EPS (64%)
Retail (n=11) Revenue (82%) Op. Income / EBIT / Pre-tax Income (82%) Strategic Goals (27%)
Technology (n=12) Revenue (67%) Cash Flow (50%) Op. income / Pre-tax Income (50%)

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

Award Leverage

CAP reviewed proxy disclosures to understand how companies establish annual incentive payout ranges (i.e., threshold payout and maximum payout expressed as a percentage of the target award). 45% of companies in our study disclose a threshold annual incentive payout at a defined level other than zero. The most common threshold payout for these companies is 50% of target. Other companies start at a 0% payout for threshold performance with payout levels progressing to target.

A majority of companies (84%) disclose a maximum annual incentive opportunity. Most of these companies (74%) have a maximum bonus opportunity of 200% of the target award; only a handful of companies (7) have a maximum payout above 200% of target. We continue to see a decline in the number of companies with a maximum payout above 200% of target (8 companies in 2017 and 11 companies in 2016).

Threshold Payout as a % of Target (n = 54)
Range % of Cos.
< 25% 24%
25% to < 50% 26%
50% 48%
> 50% to < 100% 2%
Maximum Payout as a % of Target (n = 101)
Range % of Cos.
> 100% to < 150% 5%
150% to < 200% 14%
200% 74%
> 200% to < 250% 6%
250% or more 1%

Long-Term Incentives

Long-Term Incentive Vehicle Prevalence

A vast majority of companies in our study (84%) use multiple long-term incentive vehicles for the most senior executives. Slightly more than half of the companies (55%) use two long-term incentive vehicles, typically delivered through either a long-term performance plan and time-based restricted stock/units (an uptick this year to 58%) or a long-term performance plan and stock options.

The next most common approach is to use three vehicles (29% of companies). A small percentage of companies in our study (16%) use only one vehicle and it is most typically delivered in the form of a long-term performance plan (84%).

16%55%29%Number of LTI Vehicles1 Vehicle2 Vehicles3 Vehicles

Performance-based LTI awards for senior executives is used nearly universally among large cap companies (95%) and the use of stock options has declined to 51% of companies. This contrasts our first study when the use of stock options and performance-based LTI was fairly balanced (79% used performance-based LTI and 73% used stock options). The prevalence of time-based restricted stock/units has remained flat.

95%51%62%79%73%62%Performance-Based LTIStock OptionsTime-Based RS/RSULong-Term Incentive Vehicle Prevalence2018 (n=120)2009 (n=85)

LTI Award Mix

Performance-based LTI reflects the largest portion of the LTI mix for the CEO. For the first time in our large cap company study, time-based restricted stock reflects a larger portion of the total LTI mix than stock options. The decrease in the value delivered in stock options has shifted to performance-based LTI in the overall LTI mix. The value delivered in time-based restricted stock/units has been generally flat since 2011.

46%62%34%16%20%22%20112018CEO Average Long-Term Incentive Vehicle MixPerformance-based LTIStock OptionsTime-based RS/RSUs

Restricted Stock / Units (RS/RSU) and Stock Option Provisions

The majority of companies use ratable vesting over a period of three years for time-based RS/RSU awards. Approximately 30% of companies use a vesting schedule of four years or more.

68%28%4%Time-based RS/RSUVesting ApproachRatableCliffPerf-Based72%17%11%Time-based RS/RSUVesting Years3 Years4 Years>4 Years

For stock options, most companies use 3-year ratable vesting with a 10-year term.

Stock Options
Vesting Approach Vesting (Years) Term (Years)
Ratable Perf-Based Cliff 3 4 > 4 10 < 10
82% 2% 16% 69% 26% 5% 92% 8%

Performance-Based Award Provisions

The payout curve for performance-based LTI awards with upside and downside leverage mirrors the payout curve for annual incentive awards; the most common threshold payout is 50% of target and the most common maximum payout is 200% of target. Unlike annual incentive awards, a large number of companies (41% for long-term plans vs. 26% for annual incentive plans) disclose a threshold payout between 25% – 50% of the target award.

Threshold Payout as a % of Target (n=74)
Range % of Cos.
< 25% 11%
25% to < 50% 41%
50% 46%
> 50% to < 100% 3%
Maximum Payout as a % of Target (n=106)
Range % of Cos.
100% 1%
> 100% to < 200% 32%
200% 62%
> 200% to < 250% 1%
250% or more 4%

Performance Metrics

Total Shareholder Return (TSR) continues to be the most prevalent performance metric in long-term performance plans; 63% of companies use it as a measure in the performance-based LTI plan. Return metrics are the second most common measure (51% of companies) followed by EPS (31%) and Revenue (23%).

In CAP’s first study, EPS was the most common measure followed by TSR. The rise in the use of TSR can be linked to the influence of proxy advisors who have increasingly used TSR as a proxy for performance since our first study (conducted prior to the adoption of the Dodd-Frank Wall Street Reform and Consumer Protection Act which mandated the shareholder Say on Pay vote). Of the companies that use TSR, approximately 30% disclose using it as an award modifier instead of a weighted metric.

The decline in the use of EPS in performance-based LTI plans is consistent with the decline of EPS use in annual incentive plans. Interestingly, the use of return measures has increased significantly from our first study (51% in 2018 vs. 20% in 2009) as companies are aligning executive long-term pay with profitable growth and operational efficiency. Return metrics are also often favored by institutional shareholders.

63%51%31%23%13%35%20%42%22%11%TotalShareholderReturnReturnMeasuresEPSRevenueCash FlowPerformance-based LTI Metrics2018 (n = 115)2009 (n = 65)

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.

Performance Measurement – Absolute vs. Relative

A majority of companies in our study balance absolute financial performance goals (based on budget) with relative metrics. This balanced approach has increased substantially since our first study. Today, 52% of companies use both absolute and relative metrics vs. 25% of companies in 2009. This increase is tied to the increase use of relative TSR as a long-term metric.

In our most recent study, only 11% of companies use relative performance metrics only (down from 26% in 2009) and 37% of companies use absolute metrics only (down from 49% in 2009).

60%87%11%52%37%51%74%26%25%49%RelativeMetricsAbsoluteMetricsRelative Metrics OnlyRelative and AbsoluteMetricsAbsolute Metrics OnlyPerformance-based LTI: Absolute vs. Relative Metrics2018 (n = 115)2009 (n = 65)

Perquisites

A majority of companies in our study (87%) provide perquisites to their CEO. Most companies (69%) also provide perquisites to the CFO. These findings are consistent with our study last year.

Personal use of aircraft, personal security, financial planning and automobile allowance continue to be the most common CEO perquisites. Even though the percentage of companies providing perquisites to the CEO has been relatively flat, the percentage of companies providing the most common perks has increased suggesting that when companies are providing perks to their CEO, it is likely a combination of the four most common categories.

69%45%41%38%56%29%24%31%Personal Use of AircraftPersonal SecurityFinancial PlanningAutomobile AllowanceCEO Perquisite Prevalence20182014

The median value of perquisites delivered to the CEO in 2018 ($125,000) is lower than the value five years ago ($143,000). There was nearly a 30% increase however, in the median perquisite value for the CFO in 2018 ($32,000) compared with 2014 ($25,000).

$125$32$143$25CEOCFOMedian CEO and CFO Perquisites Value ($000s)20182014

Stock Ownership Requirement Provisions

Stock ownership guidelines are very common in publicly traded companies and are viewed favorably from a governance perspective. 95% of companies in our sample have requirements in place for the NEOs. For the CEO, the median guideline (expressed as a multiple of base salary) is 6x and for other NEOs it is 3x.

Stock Ownership

Guideline

Median Multiple of Base Salary
CEO CFO Other NEO
95% 6x 3x 3x

Many companies (52%) have a stock holding requirement in place in addition to the stock ownership guideline requirement for senior executives. It continues to be less common for companies to have stock holding policies that are independent of stock ownership guidelines, or that apply after the ownership requirement has been achieved. These holding policies require executives to hold net shares received from equity awards for periods ranging from one year (most common) to post-retirement. These are generally viewed as shareholder friendly, yet their prevalence has remained fairly consistent over the past few years.

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 Post Retirement
52% 22% 54% 4% 23% 19%

For questions or more information, please contact:

Melissa Burek Partner
[email protected] 212-921-9354

Lauren Peek Principal
[email protected] 212-921-9374

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
[email protected] 212-921-9354

Lauren Peek Principal
[email protected] 212-921-9374

Bryan Roberts Senior Associate
[email protected] 713-559-2716

Michael Bonner Senior Associate
[email protected] 646-486-9744

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.

Characteristics of the CAP 100 Company Research Sample

The CAP 100 Company Research Study consists of 100 companies selected from nine industries intended to provide a broad representation of market practice among large U.S. public companies. The revenues of the companies in our sample range from $18 billion at the 25th percentile to $64 billion at the 75th percentile, with median revenues of $32 billion.

11% 12% 12% 11% 12% 10% 10% 11% 11% Automotive Consumer Goods Financial Services Health Care Insurance Manufacturing Pharmaceutical Retail Technology Industries
Percentile Rank Revenue Net Income Assets Market

Cap

Cumulative TSR for Periods ending on 12/31/2016
1-Year 3-Year 5-Year
75th $63,783 $6,379 $177,135 $106,570 94% 78% 49%
Median $31,928 $2,814 $62,396 $49,149 64% 52% 31%
25th $18,029 $1,303 $28,107 $25,261 41% 35% 19%

Pay Strategy

Among companies in CAP’s 100 Company Research, 100% disclose using 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 of these companies (31%) use more than one peer group. Companies with two or more peer groups may use an industry specific peer group as well as a general industry peer group for benchmarking purposes. Alternatively, an industry peer group may be used for benchmarking purposes and a second broader peer group, typically from an index of stocks, may be used for relative performance comparisons.

Peer Group
% 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
100% 31% 18

54% of the companies disclose a target pay philosophy for total compensation. The vast majority of these companies (91%) use median as a benchmark, with only 9% of companies targeting compensation above the median. This reflects a 10 percentage point decrease from last year in companies targeting pay above median.

Target Pay Philosophy
Element Base Bonus Cash Long-Term Incentive Total Compensation
% Disclosing 39% 28% 27% 31% 54%
% Target Median Pay 92% 100% 100% 97% 91%
% Target Above Median Pay 3% 0% 0% 0% 9%

Annual Incentive

Award Leverage

CAP reviewed proxy disclosure to understand how companies are establishing the annual incentive payout ranges (i.e., the threshold payout and the maximum payout expressed as a percentage of the target payout) for annual incentives. Most companies that we reviewed identify the minimum payout as zero and do not separately disclose a threshold level of performance. For the 41 companies that did disclose a threshold bonus payout other than zero, a payout of 50% of target is the most common percentage. 19 companies disclose a minimum bonus payout of less than 50% of target.

84 companies disclose a maximum bonus opportunity. A majority of companies (70%) have a maximum bonus opportunity of 200% of target. Four companies have a maximum bonus of 250% of target or higher, with 300% of target being the highest.

Annual Incentive Plan Payout Range
Threshold Payout as a % of Target (n = 41)
Range # of Cos. % of Cos.
< 25% 9 22%
> 25% < 50% 10 24%
50% 21 51%
> 75% < 100% 1 2%
Maximum Payout as a % of Target (n = 84)
Range # of Cos. % of Cos.
> 100% < 150% 3 4%
> 150% < 200% 11 13%
200% 59 70%
> 200% < 250% 7 8%
> 250% 4 5%

Annual Incentive Plan Metrics

Revenue, Operating Income, EPS, and Cash Flow are the most common metrics used in annual incentive plans. Most companies use two or three performance metrics to fund their annual incentive plans. Absolute financial performance targets based on a company’s budget predominate, with relative metrics used infrequently in annual incentive plans.

19% 39% 42% Number of Metrics 1 2 3+

The use of multiple performance metrics allows for annual incentive payouts to be tied more closely to overall company performance in a balanced fashion. For example, companies using bottom-line measures in the annual incentive plan will often also include top-line measures for balance.

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% Revenue EBIT/Op.Income EPS CashFlow NetIncome EBITDA ReturnMetrics Pipeline /R&D OperatingMargin OperatingEPS PretaxIncome Annual Incentive Metric Prevalence 46% 42% 30% 30% 11% 10% 10% 7% 7% 7% 7%

The use of revenue as an annual incentive metric is prevalent across most industries, along with a profit metric (e.g. operating income, EPS, net income, etc.) and cash flow.

The chart below shows the three (3) most common metrics by industry in 2016:

Industry Metrics
Metric #1 Metric #2 Metric #3
Automotive EBIT / Op. Inc. (55%) Cash Flow (55%) ROA / ROE (36%)
Consumer Goods Revenue (67%) EPS (58%) EBIT / Op. Inc. (42%)
Financial Services EPS (17%) n.m. n.m.
Health Care EPS (55%) EBIT / Op. Inc. (36%) Revenue and Cash Flow (both 27%)
Insurance EBIT / Op. Inc. (50%) Op. EPS (33%) Op. ROE (25%)
Manufacturing Cash Flow (60%) EPS (40%) EBIT / Op. Inc. (30%)
Pharmaceuticals Revenue (80%) Pipeline / R&D (70%) EPS (60%)
Retail Revenue (73%) EBIT / Op. Inc. (73%) n.m.
Technology Revenue (64%) Cash Flow (55%) EBIT / Op. Inc. (45%)

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

2016 Actual Bonus Payouts

Overall, the median CEO bonus payout for 2016 performance was 101% of target – generally flat compared to the median payout for 2015 performance of 104%. Across industries, bonuses for Pharmaceutical and Consumer Goods CEOs exceeded target by the greatest amount (125% and 123% of target, at median, respectively). Three of the nine industries CAP surveyed had a median bonus payout of less than 100%: Financial Services, Manufacturing, and Retail. Compared to bonuses paid for 2015 performance. Compared to bonuses paid for 2015 performance, Consumer Goods experienced the greatest increase and Retail the greatest decrease, year-over-year.

Median CEO bonus payouts for 2016 compared to 2015

Industry CEO Bonus Payout at a Percent of Target
75th Percentile Median 25th Percentile
2016 2015 2016 2015 2016 2015
Automotive 160% 163% 109% 100% 76% 75%
Consumer Goods 149% 146% 123% 98% 109% 71%
Financial Services 98% 124% 86% 113% 81% 91%
Health Care 129% 156% 106% 138% 86% 117%
Insurance 133% 117% 100% 102% 84% 82%
Manufacturing 116% 108% 99% 102% 85% 96%
Pharmaceutical 145% 165% 125% 155% 117% 113%
Retail 98% 153% 57% 102% 38% 84%
Technology 118% 105% 100% 94% 94% 81%
Total Sample 131% 152% 101% 104% 85% 84%

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

Over the past six years, the percentage of companies using stock options declined by 14 percentage points to 61%. The prevalence of time-based restricted stock/units declined by three percentage points. Performance-based vehicles have replaced stock options and time-based restricted stock/units over the last five years.

82% 75% 54% 97% 61% 51% 0% 20% 40% 60% 80% 100% 120% Performance-Based Stock Options Time-Based RS Prevalance of Vehicle Long-Term Incentive Vehicle Prevalance 2011 2016

The majority of companies (59%) use two vehicles to deliver long-term incentives. Of these companies, most use a combination of a long-term performance plan and stock options (57%). The next most common approach is to use three vehicles (25% of companies), and the least common approach is to use only one vehicle (16% of companies). Among companies only using one vehicle, all but two use a long-term performance plan.

16% 59% 25% Number of LTI Vehicles 1 2 3

LTI AWARD MIX

Since 2011, there has been a significant shift away from the use of stock options and time-based RS/RSUs, towards performance-based awards in the overall CEO LTI award mix.

34% 21% 20% 17% 46% 62% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2011 2016 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. 30% of companies use a vesting schedule of four years or more.

Ratable Vesting Cliff Vesting Vesting (years)
3 4 >4
63% 37% 70% 18% 12%
3 4 >4 63% 37% Ratable vs. Cliff Vesting Ratable Cliff 70% 18% 12% Vesting (years)

Stock Options

The majority of companies use a three-year ratable vesting schedule for stock options. An option term of ten years is most common.

Option

Term

Ratable Vesting Cliff Vesting Performance Vested Vesting (years)
3 4 >4
90% 10 yrs. 85% 15% 1% 65% 29% 6%
3 4 >4 85% 15% Ratable vs. Cliff Vesting Ratable Cliff 65% 29% 6% Vesting (years)

Performance Based Awards

Among companies that grant performance-based awards with downside leverage, 97% of companies define the threshold payout as 50% of target or less. At maximum, the most common payout opportunity is 200% of target with only 3% of companies providing payout opportunities greater than 200%.

Threshold Payout as a % of Target
Range % of Cos.
< 25% 14%
> 25% < 50% 38%
50% 45%
> 50% < 100% 3%
Maximum Payout as a % of Target
Range % of Cos.
100% 2%
> 100 < 200% 37%
200% 58%
> 200% 3%

Performance Metrics

Among companies in our study, Total Shareholder Return (TSR) is the most prevalent performance metric in long-term performance plans (used by 56% of companies with an LTIP). Most companies (87%) that use TSR as a performance metric measure TSR on a relative basis, while only a few companies (13%) measure TSR on an absolute basis versus pre-established goals. 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 challenges with setting multi-year financial or operational goals.

TSR does have short-comings though. It is an outcome of business strategy, rather than a driver of longer term company success. Relative TSR can also be heavily influenced by a company’s position in the cycle. For example, a period of lower performance can be followed by a sharp upswing or vice versa. However, most companies (91%) that use TSR as a metric use it with another metric—most commonly, a return metric or EPS. Further, among companies that use TSR, 32% use it as a modifier only.

Return measures are the second most prevalent (47% of companies) type of performance metric, followed by EPS (29%) and Revenue (24%). 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 and adjustments, if any – companies should consider metrics that support long-term value creation in their industry. For example, many companies in the Technology and Pharmaceutical industries use TSR as a metric. Companies in these industries want to motivate executives to drive success through the development of new products. As successes in new product development impact a company’s stock price before impacting its financial statements, TSR is a good indicator of future growth and profitability and aligns executives’ interests with those of shareholders.

Companies tend to use multiple metrics to create balance in their performance plans.

20% 42% 38% Number of Performance Metrics 1 2 3

Performance Measurement – Absolute Vs. Relative

Among the companies in our study, 51% use a combination of absolute and relative performance goals in their long-term performance plans, up from 48% in the prior year. This approach motivates executives to achieve the company’s internal financial goals, while also balancing results relative to comparable companies. When goals are relative, goal setting is also, typically, substantially simplified.

36% 41% 34% 24% 14% 45% 80% 56% 47% 29% 24% 16% 61% 87% Total ShareholderReturn Return Measures EPS Revenue Cash Flow Relative Metrics Absolute Metrics 2011 (n = 94) 2016 (n = 97)

Note: Percentages add to greater than 100% due to multiple responses. Return measures reflect ROE, ROI, ROIC, and ROA.

Performance Measurement Period

Among companies that use a long-term performance plan (stock/units or cash), 96% have at least one plan with a three-year performance measurement period. Only two companies have a plan with a longer measurement period.

Perquisites:

The percentage of companies in our research providing perquisites to their CEO increased from 82% in 2013 to 87% in 2016. The percentage of companies providing perquisites to CFOs was 73% in 2016.

In 2016, the four most common CEO perquisites were: personal use of corporate aircraft (58%), personal security (30%), automobile allowance (30%) and financial planning (27%).

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

The median total value of CEO perquisites in 2016 remained steady vs. 2015 at ~$122,000. This value has ranged from $122,000 to $143,000 over the last four years. For CFOs, the median value of perquisites has also been relatively flat year-over-year and has ranged from $23,000 to $26,000 since 2013.

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

Shareholder Friendly Provisions:

Stock ownership guidelines (SOG), hedging, pledging, and clawback policies have become very common for publicly traded companies. Companies are encouraged to implement these polices by pending legislation/rules, proxy advisory firms, and by shareholders.

Stock Ownership Guideline Hedging Pledging Clawback
96% 97% 82% 98%

In addition to stock ownership guidelines, many companies, particularly larger companies, have instituted stock holding policies. Among companies with stock ownership guidelines, 55% have a holding policy associated with the SOG. Among these companies, 89% require holding until the stock ownership guideline is met. Independent of stock ownership guidelines, 33% of companies have instituted a “stand-alone” holding requirement.

Holding Policy in Relation to SOG If there is a holding policy in relation to SOG Holding requirement, independent of SOG
Until Guideline Met After Guideline met
55% 89% 32% 33%

For questions or more information, please contact:

Melissa Burek Partner [email protected] 212-921-9354

Margaret Engel Partner [email protected] 212-921-9353

Michael Keebaugh Associate [email protected] 646-532-5931

Michael Bonner Associate [email protected] 646-486-9744

Michael Biagi Associate [email protected] 646-486-9743

Ryan Colucci provided research assistance for this report.

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.

Click here to download the full report

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.

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