Never fall behind on the latest trends in CEO pay ratio with CAP’s CEO Pay Ratio Tracker. The CEO Pay Ratio Tracker uses each company’s most recent pay ratio disclosure.

 

Revenue and Market Cap Filters

  • Select the desired Revenue and Market Cap scopes using the text boxes

Sector Breakdown Chart

  • Chart shows the sector breakdown for companies within the selected Revenue and Market Cap scopes
  • Hover over each section to see the percentage and number of companies in each sector
  • Click on each section to show pay ratio data for only that sector
  • Select multiple sectors by holding down the Ctrl key
  • Click the center of the Sector Breakdown chart to reset to all companies
  • The number of companies in the selected scope will show in the center of the Sector Breakdown chart

Pay Ratio – Percentiles Chart

  • Chart shows pay ratio data for companies in the selected sector and Revenue and Market Cap scopes
  • When a sector is selected, bolded bars show data just for that sector and lighter bars show data for all companies within the selected Revenue and Market Cap scopes

For questions or more information, please contact: Ryan Colucci Senior Associate ryan.colucci@capartners.com 646-486-9745 or Joshua Hovden Senior Analyst joshua.hovden@capartners.com 646-512-9135.

Click here to read more about the second year of CEO Pay Ratio disclosures: https://www.capartners.com/cap-thinking/deep-dive-second-year-ceo-pay-ratio-disclosures/.

Compensation Advisory Partners (CAP) examined executive compensation levels and design practices at 12 publicly traded, U.S. investment banks. The 12 companies in the study have a revenue range of $139 million to $7.2 billion. The broad revenue range enabled CAP to focus on independent, advisory-focused investment banks and to have a sufficient sample for the study. As an additional reference point for comparison purposes, CAP also reviewed executive compensation levels and practices at three large, diversified financial institutions (“Wall Street Banks”) with significant investment banking operations. Revenue at the Wall Street Banks ranged from $35.9 billion to $104.0 billion.1

Key Takeaways

  • The investment banking pay model and the industry’s approach to incentive compensation are distinct from general industry practices, and are important to understand when evaluating market data.
  • Median pay levels for Chief Executive Officers (CEOs) increased 11 percent from 2017 to 2018, which reflects strong 2018 operating results. Pay levels for Chief Financial Officers (CFOs) increased five percent, while pay levels for other Named Executive Officers (NEOs) increased 11 percent.
  • Two-thirds of the investment banks studied now grant performance share units (PSUs) to their CEOs as part of annual incentive compensation awards. CAP expects a continued increase in the prevalence of PSU awards.
  • For the investment banks that grant PSUs to their CEOs, the grant value of PSU awards represents approximately one-half of the total value of the deferred, long-term portion of incentive compensation.

A Unique Industry

From economic, performance and compensation perspectives, independent investment banks stand apart from general industry and other financial services firms. The unique aspects of the industry are important to understand when looking at their executive compensation levels and practices.

Human Capital Focus. The investment banking industry has a strong human capital focus: The industry’s assets are its people. Most individuals in the industry are highly educated, trained and compensated. A firm’s success depends on its ability to attract, retain and reward highly skilled bankers with strong business networks and deal-execution skills. Given the industry’s human capital focus, the largest expense category for investment banks is compensation and benefits.

Year-to-Year Results. Like most professional services firms, investment banks focus heavily on year-to-year financial metrics, such as revenue growth, operating margin and overall profitability. The industry tends to be cyclical and highly sensitive to overall economic conditions. In addition, a firm’s results for the year can be skewed by factors such as a large deal closing in January instead of prior to December 31.

A key metric in the evaluation of most senior, non-corporate investment-banking professionals is annual revenue generation. Long-range planning is largely limited to senior corporate executives, and firm investments often generate returns more quickly than in capital-intensive industries.

The Investment Banking Pay Model. Investment banks approach executive compensation in a manner that is distinct from general industry norms. At investment banks, each year a total incentive is determined based on an often highly discretionary review of prior-year performance. The total incentive is then delivered to executives as a mix of annual cash incentive compensation and deferred, long-term incentive compensation. Of the investment banks in CAP’s study, 92 percent use this investment banking pay model for top executives, as do all three Wall Street Banks.

The investment banking pay model contrasts with the broadly used, traditional compensation model where annual incentive and long-term incentive components are separate and determined independently. In most other industries, the annual cash incentive is often determined in a highly structured, formulaic manner, and the annual long-term incentive grant target value is largely market-based, with the grant value being typically independent of prior-year performance.

While executive incentive awards in the investment banking industry tend to be more discretionary in nature when juxtaposed with the more formulaic approach used in general industry, the investment banks do base their year-to-year incentive decisions on specific criteria, such as revenue and profitability. In fact, several of the investment banks in the study disclosed information about their incentive decision-making processes, which can be thought of as following a “structured discretion” approach.

2018 Industry Performance

The investment banks in CAP’s study reported strong operating results for 2018. Revenue increased 14.9 percent, and pre-tax operating income increased 39.7 percent. Despite this, the investment banks’ total shareholder return (TSR) – which takes into account stock price changes and dividends – was down 19.8 percent during 2018, driven by steep declines in the fourth quarter.

The following table summarizes financial and market results for CAP’s investment banking sample for 2018 and 2017:

Metric

Median Percent Change

Year Ended December 31, 2018

Year Ended December 31, 2017

Revenue

+14.9%

+13.4%

Pre-tax Operating Income

+39.7%

+14.3%

Operating Margin

+2.4%

+0.1%

Return on Equity (ROE)

+4.5%

-1.4%

1-Year TSR

-19.8%

+25.6%

3-Year TSR (compound annual growth rate, or CAGR)

+5.7%

+6.3%

Source: S&P Capital IQ financial database

In addition to the traditional financial and market-based performance measures, investment banks track and report a human-capital metric called the compensation and benefits ratio. The ratio reflects compensation and benefits expenses as a percentage of revenue. The compensation and benefits ratio among CAP’s investment banking sample declined by 9.3 percentage points for full year 2018 versus full year 2017. This decrease was driven by the year-over-year change in revenue (+14.9 percent), which outpaced changes in compensation and benefits costs.2

59.6%67.8%36.0%37.4%0%10%20%30%40%50%60%70%80%90%100%20182017Compensation and Benefts Ratio2Investment Banks (n=12)Wall Street Banks (n=3)

Source: S&P Capital IQ financial database

The compensation and benefits ratio is higher for the investment banks in the study relative to the Wall Street Banks. The Wall Street Banks have multiple business lines in addition to investment banking, and have a more diversified workforce in terms of employee roles and pay levels.

Named Executive Officer (NEO) Compensation

CAP analyzed 2017 and 2018 pay levels for the five NEOs disclosed in the proxy statements for each of the investment banks. While base salaries were flat from 2017 to 2018, total compensation was up year-over-year, reflective of an industry focused on linking pay outcomes with performance outcomes.

Compensation Component

Median Percent Change

Year Ended December 31, 2018

CEO

CFO

Other NEOs (avg.)

Base Salary

No Change

No Change

No Change

Incentive Pay

+11.8%

+5.1%

+12.2%

Total Direct Compensation

+11.4%

+4.9%

+11.1%

The year-over-year pay increase for the CEO and other NEOs was approximately 11 percent, which reflects the industry’s strong 2018 operating performance. The pay increase for the CFO was smaller, at approximately five percent, which is in part reflective of a smaller portion of annual pay being variable for this role, as discussed further below.

Pay Mix and Incentive Compensation

As shown in the pay-mix charts that follow, the investment banking industry places significant emphasis on performance-based, variable incentive compensation. On average, performance-based, variable incentive compensation represents 92 percent of annual pay for CEOs of the investment banks. The other NEOs have a pay mix that is similar to that of CEOs, with 90 percent of annual pay delivered through variable incentive compensation. In contrast, CFOs at investment banks have a slightly less variable pay mix, with about 80 percent delivered through variable incentive compensation and 20 percent delivered in salary.

Average Compensation Mix Among Investment Banks 8%33%59%22%46%32%10%46%44%Base SalaryCurrent Cash IncentiveDeferred/Long-Term IncentiveCEO CFOOther NamedExecutive Ofcers

Investment banks deliver incentive compensation using a mix of cash and deferred equity vehicles, such as restricted stock, restricted stock units and performance share units (PSUs). The long-term incentive component adds a retention hook by deferring payment of a portion of annual incentive pay. It also provides a link to the company’s long-term shareholder value creation. Among the investment banks in the study, approximately two-thirds of CEO incentive pay and approximately one-half of incentive pay for other NEOs have been deferred over at least three years, most often through restricted stock/units but also through performance share units (PSUs).

A notable change within the investment banking industry has been taking place in terms of long-term incentive vehicle prevalence. PSUs have been increasing in prevalence among study companies. In fact, a majority of CEOs of the investment banks now receive annual PSU awards, with prospective, generally three-year performance requirements. Among the CEOs who receive PSUs, approximately half of long-term incentive compensation is provided through these awards. The most common performance metrics associated with PSU use in the investment banking industry are TSR and return measures, such as return on equity (ROE), followed by revenue growth and operating margin.

While investment banks will continue to focus on prior-year performance in making incentive pay decisions, CAP believes that the use of PSUs for top corporate executives will continue to increase at the investment banks in the study. Investors and proxy advisors (i.e., Institutional Shareholder Services, or ISS, and Glass Lewis) encourage the use of PSU programs with prospective multi-year goals.

Equity Overhang

CAP analyzed equity overhang, which is a measure of shareholder dilution. Median equity overhang for the investment banks is 28.0 percent, which exceeds ISS “excessive dilution” thresholds but should be considered within the context of the industry’s human capital focus and the partnership model from which these public companies emerged. The average equity overhang for the Wall Street banks is 13.6 percent.3

ISS Limit (Russell 3000) 28.0%13.6%0%5%10%15%20%25%30%Investment BanksWall Street BanksEquity Overhang3

ISS uses its Equity Plan Scorecard (EPSC) model to determine the shareholder vote recommendation for new share requests for equity and incentive compensation plans. The EPSC includes certain “overriding” factors, one of which is “excessive” dilution. This factor, which applies to S&P 500 and Russell 3000 EPSC models only, will be triggered by ISS when the company’s equity compensation program is estimated to dilute shareholders’ holdings by more than 20 percent (S&P 500 model) or 25 percent (Russell 3000 model). This overriding factor may warrant an ISS “against” vote recommendation despite an above-threshold EPSC score. All but one of the investment banks in the study are in the Russell 3000, while only two of the companies are in the S&P 500. All three Wall Street banks are in both indices.

Two-thirds of the investment banks have equity overhang levels that would exceed the ISS “overriding” factor threshold. This indicates that, for a majority of publicly traded investment banks, ISS would be likely to recommend that shareholders vote against a new share request no matter what the plan features are or what the benefits of maintaining an ongoing equity compensation plan are to various stakeholders, including the company, employees and shareholders. The ISS “overriding” factor threshold does not make sense for the investment banking industry and exemplifies why industry-specific understanding is important when designing and evaluating compensation programs.

When publicly traded investment banks seek shareholder approval for new share requests, shareholder outreach is advisable, and the resolution should include information that makes a strong case for the share request. Also, setting internal expectations for a likely level of shareholder support is important. For example, among non-S&P 500, Russell 3000 investment banks, median shareholder support for such new share requests during the past three years was approximately 66 percent. ISS recommended that shareholders vote against the proposals, but each time the proposals passed with majority shareholder support (albeit, with lower support than broader market norms, in part driven by proxy advisor policies that do not take into account industry-specific considerations).

Equity Run Rate

CAP also analyzed the equity run rates for the investment banks. Equity run rates measure shareholder dilution from equity grants made in a particular year. In recent years, the median annual gross run rate for the investment banks has ranged from about four percent to 7.5 percent.

Given its human capital focus and approach to incentive compensation, this industry often focuses more on the net run rate, which takes into account forfeitures and repurchases, than on the gross run rate used in most industries. For example, the net run rate is frequently the only version of run rate discussed in new share request proposals in this industry. Among the investment banks, the median net run rate has ranged from approximately -1.3 percent to 2.3 percent in recent years. In this industry, buybacks are often viewed as a tool used to limit or net-out annual shareholder dilution from compensation programs.

Peer Groups for Compensation Benchmarking

CAP assessed the size and composition of the peer groups used by the investment banks for compensation benchmarking purposes. Publicly traded companies generally disclose the peer groups they use for compensation benchmarking purposes in their annual proxy statements. Relative to other industries, the peer groups used by the investment banks are smaller and more industry focused.

Among the investment banks studied, the median peer group size is 11 companies, while the 75th percentile is 14 companies. The peer group size for the Wall Street banks is even smaller, with an average of six companies. In contrast, a recent Equilar and CAP study of 500 companies across different industries found the median peer group size to be 17 companies.

The investment banking peer groups are smaller than those used in other industries because the executive compensation programs in this industry are unique, and companies choose to compare themselves mostly with publicly traded direct competitors – of which a limited number exist. This is very different than how peer groups are approached in many other industries where companies are screened more broadly for size and other operating metrics. In the 500-company general industry sample noted above, only eight percent of companies maintained a peer group where at least 75 percent of constituent companies were from the same industry classification, and only 30 percent of companies maintained a peer group where 100 percent of constituent companies were from the same industry sector classification. In addition, only 54 percent of companies maintained a peer group where at least 75 percent of constituent companies were from the same, broader industry sector classification.

Moreover, when developing or validating a peer group used for executive compensation benchmarking, it is typical practice to use quantitative screens for size and/or other operating metrics. Oftentimes, potential peers with less than one-half or more than two times the revenue of the company are eliminated. However, the investment banks studied do not generally use such narrow size screens when developing or validating their compensation benchmarking peer group.

CEO Pay Ratio

In 2017, most publicly traded companies were required to begin reporting in their annual proxy statement the CEO Pay Ratio, which is the ratio of CEO compensation to that of the median employee. For the investment banks, CEO compensation in 2018 was 42 times the compensation of the median employee at the company. This is significantly less than the median CEO pay ratio among Russell 3000 companies as shown in the following table. The lower CEO pay ratio at investment banks is driven by higher median employee pay relative to general industry.

Investment Banks

Russell 3000

2018 Median CEO Pay Ratio

42x

78x

2018 Median CEO Pay

$5,389,867

$5,422,777

Change from 2017

+7%

2018 Median Employee Pay

$179,011

$61,782

Change from 2017

+9%

The average CEO pay ratio for the three Wall Street Banks was 243x in 2018, much higher than both the 42x and the 78x shown above. Among the Wall Street Banks, average CEO pay was approximately $20 million and average median employee pay was nearly $120,000. CEO pay at the Wall Street Banks reflects the size and complexity of the organizations, and the lower median employee pay reflects the greater variety of business lines and employee roles.

Conclusion and Looking Ahead

During 2018, the investment banks in CAP’s study rewarded executives commensurately with operating performance outcomes. PSU awards, with prospective, pre-defined multi-year performance goals, are now a significant part of incentive compensation awards for CEOs at the majority of the investment banks in the study. Looking ahead, we expect to see an increasing prevalence of PSU awards for corporate leaders at public investment banks. We also expect to see many companies within this industry enhancing their compensation-related shareholder communication, proxy-based and otherwise. Lastly, we have seen the industry heighten its focus on gender pay equity and representation by women in the management ranks; we expect this trend to continue.

The market for talent among independent, advisory-focused investment banks is highly competitive. Companies can choose to compete or fall behind. Doing so effectively – according to internal and external stakeholders – requires real-time industry insight, deviating from market practices that are common in other industries, and a compensation-related shareholder communication strategy that specifically addresses important industry-specific distinctions.

For questions or more information, please contact:

Bonnie Schindler Principal
Bonnie.Schindler@capartners.com 847-636-8919

Matt Vnuk Principal
Matt.Vnuk@capartners.com 212-921-9364

Whitney Cook and Brooke Warhurst provided research assistance for this report.

Appendices

Key Terms Defined

Compensation & Benefits Ratio

Compensation and benefits expense as a percent of revenue.

Equity Dilution or Overhang

Represents maximum potential dilution (i.e., the sum of all outstanding or available shares under equity plans divided by the sum of the company’s common shares outstanding and all outstanding or available shares under equity plans).

Equity Run Rate (also called “Burn Rate”)

Represents equity grants (including full-value shares and stock options) made during the year divided by the company’s average common shares outstanding.

Investment Bank Compensation Model

Reflects an often highly discretionary review of prior-year performance. The total incentive is then delivered to executives as a mix of annual cash incentive compensation and deferred, long-term incentive compensation.

ISS Excessive Dilution Threshold

ISS policy to vote against new share requests when the company’s equity compensation program is estimated to dilute shareholders’ holdings by more than 20 percent (S&P 500 company) or 25 percent (non-S&P 500, Russell 3000 company).

Net Run Rate (also called “Net Burn Rate”)

Represents equity grants (including full-value shares and stock options) made during the year minus forfeitures and repurchases divided by average common shares outstanding.

Operating Margin

Measures how much profit a company makes on each dollar of revenue. The calculation is operating income, or earnings before interest and taxes, as a percentage of revenue.

Total Direct Compensation (TDC)

The sum of base salary; annual incentives and bonuses; and long-term incentives, such as restricted stock, stock options, and cash- and share-based performance plans.

Total Shareholder Return (TSR)

TSR measures the change in stock price over a period of time, with dividends assumed to be reinvested at the time they are paid.

Traditional Compensation Model

Reflects a compensation structure where annual incentive and long-term incentive components are separate and determined independently. This is the typical pay model across industries.


1 When summary statistics are reported in this study, medians are used for the 12 public investment banks, while averages are used for the three Wall Street Banks.

2 When summary statistics are reported in this study, medians are used for the 12 public investment banks, while averages are used for the three Wall Street Banks.

3 When summary statistics are reported in this study, medians are used for the 12 public investment banks, while averages are used for the three Wall Street Banks.

Investment Banks

  • Cowen Inc.
  • Evercore Inc.
  • Greenhill & Co., Inc.
  • Houlihan Lokey, Inc.
  • Jefferies Financial Group Inc.
  • JMP Group LLC
  • Lazard Ltd
  • Moelis & Company
  • Piper Jaffray Companies
  • PJT Partners Inc.
  • Raymond James Financial, Inc.
  • Stifel Financial Corp.

Selected Wall Street Banks

  • The Goldman Sachs Group, Inc.
  • JPMorgan Chase & Co.
  • Morgan Stanley

Compensation Advisory Partners (CAP) conducted a study of executive compensation levels and design practices in the banking industry. The study includes 19 U.S. banks with greater than $50 billion in assets across three different groups: Money Center banks (n=4), Custody banks (n=3), and Super Regional banks (n=12). This report summarizes the findings of CAP’s study and identifies other hot topics in executive compensation affecting the banking industry.

Key Takeaways

  • Pay and performance: 2018 performance was mixed. Pre- and post-tax earnings growth improved over the prior period, while revenue growth and total shareholder return (TSR) were weaker. Chief executive officer (CEO) compensation generally aligns with these results, with CEO pay increasing in 2018, but to a lesser degree than in 2017.
  • Compensation program design: In recent years, executive incentive plan design among banks in this group has been stable. Earnings per share (EPS) is the most common short-term incentive metric and return on tangible common equity (ROTCE) is the most common long-term incentive metric. Stock options continue to be less common among banks than among companies in other industries.
  • Looking ahead: Diversity and inclusion and gender pay equity, the adoption of the new credit loss measurement standard, and regulators’ intentions to finalize Dodd-Frank rules governing incentive compensation at banks are some of the key issues that compensation and human resources committees of banks will need to consider in the second half of 2019 and beyond.

2018 Pay and Performance Outcomes

2018 was a mixed performance year for the banks in CAP’s study. EPS and net income both grew significantly, due in large part to the reduction in the corporate tax rate under the Tax Cuts and Jobs Act of 2017. Operating income growth was also up in 2018, indicating that strong operating results also played a part in the increases in EPS and net income. At the same time, revenue growth in 2018 was slightly lower than revenue growth during the prior year. TSR declined for the one-year period that ended December 31, 2018, consistent with the overall market. In addition, TSR was lower for the three-year period that ended December 31, 2018, than for the prior three-year period that ended December 31, 2017. The chart below summarizes median performance results for the banks in CAP’s study:

Metric

Median Percent Change

Year Ended December 31, 2017

Year Ended December 31, 2018

EPS

+14.0%

+31.7%

Net Income

+15.3%

+25.9%

Pre-tax Operating Income

+9.6%

+13.4%

Revenue

+7.0%

+5.4%

1-Year TSR

+19.3%

-18.3%

3-Year TSR (Cumulative)

+57.1%

+25.3%

Source: S&P Capital IQ Financial Database.

In 2018, total direct compensation, including base salary, annual cash bonus, and awarded long-term incentives, among CEOs increased 7.8 percent versus 2017 at median. This is a smaller increase than in 2017 when total direct compensation for CEOs increased 11.1 percent at median. The smaller increase in 2018 is primarily due to changes in annual cash bonuses, which were mixed among this group and resulted in an increase of 1.5 percent at median. This is a shift from the period from the prior year when nearly all banks in CAP’s sample increased CEO bonuses, and the median increase was 16.3 percent. The chart below summarizes median changes in CEO pay for the group:

Element

Median Percent Change for CEOs

Year Ended December 31, 2017

Year Ended December 31, 2018

Base Salary

No Change

No Change

Annual Cash Bonus

+16.3%

+1.5%

Awarded Long-term Incentive

+7.0%

+6.5%

Awarded Total Incentive

+12.7%

+7.8%

Total Direct Compensation

+11.1%

+7.8%

Compensation and benefits expense increased approximately three to four percent at median on an absolute basis in 2017 and 2018 but stayed relatively flat as a percentage of revenue. In addition, compensation and benefits expense declined as a percentage of net income, likely due to tax reform.

Median Compensation and Benefts Expense35.4%160.4%33.8%139.7%34.1%106.9%0%20%40%60%80%100%120%140%160%180%201620172018As % of RevenueAs % of Net Income

Executive Compensation Program Design

Incentive Compensation Model

The banking industry is different from other industries in that some banks determine a total incentive award based on annual performance and then allocate the total incentive between annual cash bonus and long-term incentive awards (e.g., the total incentive award for the year is delivered 40 percent through an annual cash bonus and 60 percent through long-term incentives). One-third of the banks in CAP’s study use this approach. The remaining two-thirds make separate decisions for the annual cash bonus and long-term incentive awards, which is consistent with general industry practices.

Short-term Incentive Plan

Short-term incentive plans in the banking industry tend to be more discretionary than in other industries. Of the companies in CAP’s study, 47 percent have primarily discretionary short-term incentive plans.

The remaining 53 percent of companies maintain more formulaic short-term incentive plans that pay out, at least in part, based on financial results relative to pre-established “threshold”, “target”, and “maximum” goals. These plans most often provide for a payout of 200 percent of target for “maximum” performance or better, though several companies provide maximum opportunities of less than 200 percent of target, and one company provides a maximum opportunity of greater than 200 percent of target.

EPS is the most common financial metric across these short-term plans. Companies also use Efficiency Ratio, return on assets (ROA), and ROTCE, but they are less common in short-term plans. Most companies measure annual performance against absolute performance goals; however, several companies include a relative performance component.

90%40%30%30%20%100%40%10%10%0%10%20%30%40%50%60%70%80%90%100%EPSEfficiency RatioROEROAPre-Provision Net RevenuePre-tax / Operating IncomeNet IncomeAbsoluteRelative

Note: Percentages do not add to 100 percent due to some companies using multiple metrics.

Long-Term Incentive Plan

Long-term incentive programs among companies in CAP’s study are most often composed of time-based restricted stock or units and long-term performance plans (e.g., performance share units). Only 26 percent of banks in the study use stock options, making them less common among this group than in the broader market. Companies tend to weight long-term performance plans as at least 50 percent of the target total long-term incentive award. Of the companies in the study, 11 percent use long-term performance plans as their only long-term incentive vehicle. The chart below outlines the average long-term incentive mix across companies in CAP’s study:

14%5%51%65%35%30%64%36%Banks with All Three Vehicles (n=5)All Banks (n=19)Average Long-term Incentive MixLong-term Performance PlanTime-based Restricted Stock/Units Stock Options

Note: Two companies use long-term performance plans as their only long-term incentive vehicle and one company uses a long-term performance plan and stock options.

84 percent of the banks in CAP’s study use return on equity (ROE) or a variant of that measure as a metric in their long-term performance plans. Variants of ROE include ROTCE and return on common equity (ROCE). ROTCE is the most common of these variants. Relative TSR and EPS are also common long-term performance plan metrics.

68 percent of companies use at least one relative metric in their long-term performance plans. Specifically, nearly all Super Regional banks use relative metrics in their long-term performance plans. In other industries, relative metrics are typically limited to TSR; however, the banks in CAP’s study also use relative financial measures, including relative ROE variants, EPS growth, and ROA. This is likely due to the significant degree of comparability between the Super Regional banks in CAP’s study.

47%32%32%26%21%100%68%16%11%0%10%20%30%40%50%60%70%80%90%100%ROTCETSRROEEPSROAPre-tax / Operating Income / MarginROCE5%5%Book Value5%RevenueEfficiency RatioAbsoluteRelativePrevalence of Long-term Incentive Metrics (n=19)

Note: Percentages do not add to 100 percent due to some companies using multiple metrics.

Among banks, long-term performance plans most often have maximum payout opportunities of 150 percent of target. In the broader market, most long-term performance plans have maximum payout opportunities of 200 percent of target. Maximum opportunities tend to be lower at banks due, in part, to regulatory guidance to limit upside leverage in incentive plans to avoid encouraging imprudent risk-taking.

Stock Ownership Guidelines and Holding Requirements

In recent years, practices around stock ownership guidelines and holding requirements have generally been stable. All of the banks in CAP’s study have ownership guidelines and/or holding requirements.

89 percent of companies maintain stock ownership guidelines. Most companies express the guideline as a multiple of salary. The most common guidelines are 6x base salary for CEOs and 3x base salary for other NEOs, though several companies maintain higher guidelines.

3%3%35%47%18%44%56%Greater than 6Less than 66xGreater than 33x

Note: Guidelines that are not a multiple of salary have been converted to an implied multiple of salary in the charts above.

In the years following the 2008 financial crisis, several banks in CAP’s study, including the Money Center banks, adopted policies requiring NEOs to hold a portion of the net after-tax shares received from stock vesting or option exercises (“net shares”) until retirement or termination from the company or later. Many thought this trend would catch on throughout the banking industry; however, most smaller banks never adopted such policies. Of the companies in CAP’s study, 42 percent disclose policies of this kind. These policies typically require NEOs to hold 50 percent of net shares until retirement or one-year post-retirement.

Looking Ahead to the Rest of 2019 and Beyond—Hot Topics in Executive Compensation

Diversity and Inclusion and Gender Pay Equity

In recent years, corporate diversity and inclusion have become a main area of focus culturally and for certain institutional shareholders. As a result, compensation and human resources committees are increasingly focusing on gender pay equity and representation at companies across industries. In particular, the financial services industry faces intense public scrutiny around its diversity and inclusion policies and gender pay equity.

This public pressure has only increased in 2019. Earlier this year, Arjuna Capital, an institutional investor that is notably outspoken on this topic, published a gender pay equity scorecard that included several of the banks in CAP’s study. In June, Congresswomen Maxine Waters and Joyce Beatty sent a letter to bank holding companies with assets of greater than $50 billion, requesting information about each institution’s diversity and inclusion data and policies. In 2019, 21 percent of companies in CAP’s analysis included shareholder proposals in their proxy statements requesting that the banks report the median gender pay gap. Though these proposals failed to receive majority support from shareholders, CAP expects that requests for disclosure around diversity and inclusion policies and gender pay equity will continue both in the banking industry and broader market.

Current Expected Credit Loss (CECL) Standard

One key development for 2020 is the implementation of the Financial Accounting Standards Board’s (FASB’s) new credit loss measurement approach, the current expected credit loss (CECL) model, which will impact loan loss reserves. An early announcement from JPMorgan Chase indicates that it expects the change to increase reserves by 35 percent; however, the impact on reserves will vary from bank to bank based, in part, on the makeup of the loan portfolio. The move to the new reporting standard will impact results for profit and return measures and may have an impact on incentive plan goals that were previously set for outstanding long-term performance plan cycles.

Dodd-Frank Rules on Incentive Compensation at Banks

Recently, news outlets have been reporting that regulators plan to finalize the Dodd-Frank rules governing incentive compensation at banks ahead of the 2020 presidential election. While this may seem counterintuitive to the current climate of deregulation, many believe that the current administration aims to finalize the rules to prevent the adoption of more onerous rules under a Democratic administration. If regulators move forward with this agenda item, banks will need to review their current incentive plans and, as necessary, consider adjusting them to comply with the final rules.

Mergers and Acquisitions (M&A) Activity

Early in 2019, BB&T Corporation and SunTrust Banks, Inc. announced that they will merge to create the eighth largest U.S. bank by assets. The combined bank will be called Truist Financial. The industry has not seen a merger of this magnitude since the 2008 financial crisis. The success of this combination could indicate a shift in attitudes around M&A activity between major financial institutions. However, given the regulatory uncertainty heading into the 2020 election, it remains to be seen if this merger will be the first in a series or a one-time event.

Conclusion

Compensation programs among the banks in CAP’s study continue to effectively tie pay outcomes to performance. In recent years, incentive plan designs among these banks have generally been stable.

However, the impending change in regulatory guidance following adoption of final Dodd-Frank rules may cause banks to begin to adjust incentive plan designs, though will likely not result in major changes. Other areas of uncertainty, including the impact of the implementation of the CECL standard, potential for a credit cycle or economic downturn, and uncertainty around the 2020 election, may affect incentive plan goal-setting processes or cause banks to make additional adjustments to executive compensation programs in 2020 and 2021.

For questions or more information, please contact:

Eric Hosken Partner eric.hosken@capartners.com 212-921-9363

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

Diane Lee and Joshua Hovden provided research assistance for this report.

Banks in CAP’s Study (n=19)

Money Center Banks

  • Bank of America Corporation Citigroup, Inc.
  • JPMorgan Chase & Co.
  • Wells Fargo & Company

Custody Banks

  • The Bank of New York Mellon Corporation Northern Trust Corporation
  • State Street Corporation

Super Regional Banks

  • BB&T Corporation
  • Citizens Financial Group, Inc. Comerica, Inc.
  • Fifth Third Bancorp
  • Huntington Bancshares, Inc.
  • KeyCorp
  • M&T Bank Corporation
  • The PNC Financial Services Group, Inc. Regions Financial Corporation SunTrust Banks, Inc.
  • U.S. Bancorp
  • Zions Bancorporation

Compensation Advisory Partners, Equity Methods and PayFactors are sponsoring a long-term incentive (LTI) survey. The purpose of this survey is to provide insight on LTI design features and pay levels below the most senior executive positions as this type of information is challenging to obtain from published survey data. We want to provide a simplified output to help participants understand the typical LTI award opportunities and vehicles used at different salary levels within an organization.

This LTI survey will focus on the following by salary level:

  • LTI target opportunity levels
  • LTI mix
  • Design features of LTI vehicles
  • Stock ownership guidelines

Click here for a summary of topics covered.

The survey will take approximately 30 minutes to complete. Submission deadline is Friday April 5, 2019. All responses will be kept confidential and participants will receive a complimentary report on survey findings.

If you have any questions, please contact surveys@capartners.com and someone will respond within 1 business day.

Click here to participate

In late 2018, Institutional Shareholder Services (ISS) and Glass Lewis & Co (Glass Lewis) each issued proxy voting guidelines for 2019. While policy changes announced by both firms were minimal, both ISS and Glass Lewis announced policy updates aimed at increasing female representation on boards of directors. This summary highlights some changes to ISS and Glass Lewis’ policies for 2019 and is not intended to be all encompassing.

ISS Policy Updates

ISS did not make substantial changes to its policy for 2019. In fact, ISS postponed implementing a vote recommendation on excessive director pay that was to be introduced in 2019. After receiving investor feedback, ISS revised its methodology for identifying excessive director pay and will begin making vote recommendations in 2020. Under the new policy, ISS will recommend a vote “Against” Board members responsible for setting director pay if individual director pay is above the top two to three percent of a company’s index and sector for two or more consecutive years (e.g., 2019 and 2020). ISS will consider mitigating factors, such as compression in pay within the index and sector, disclosure of a rationale for a director’s pay positioning, and a larger equity grant at time of joining the board, in its vote recommendation.

In addition to the vote recommendation on director pay in 2020, ISS will recommend an “Against” vote for the Nominating Committee Chair if the Board does not have female representation. This will apply to companies in the Russell 3000 and S&P 1500 indices for meetings that occur after February 1, 2020.

Another policy change anticipated for 2019 was ISS replacing the metrics in the pay-for-performance assessment. However, ISS did not make any changes to their assessment from 2018. ISS considered using Economic Value Added (EVA) in lieu of the current GAAP measures (Return on Invested Capital, Return on Equity, Return on Assets, Earnings Before Interest, Taxes, Depreciation and Amortization growth and/or Cash Flow (from operations) growth). Instead, ISS will disclose a company’s EVA performance as additional information within the research report and not in the Financial Performance Assessment (FPA). This is similar to the approach ISS used in 2017 for the FPA. ISS introduced the FPA as additional information in the research report in 2017 and, ultimately, incorporated it into the pay-for-performance assessment a year later. ISS may use a similar approach with EVA.

In addition to these policy updates, ISS provided clarification on its views on the use of TSR as an incentive metric, front-loaded awards and impact from regulatory updates, as well as updated its list of problematic pay practices as summarized in the below chart. For information on all ISS policy updates, please visit https://www.issgovernance.com/policy-gateway/latest-policies/

Other Select ISS Policy Updates

Front-loaded Awards

Will likely recommend “Against” a company’s say on pay (SOP) vote for large multi-year awards that are intended to cover more than four years.

Updated Problematic Pay Practices

Added the definition of “Good Reason” whereby an executive could receive a windfall in the event of a corporate failure (such as bankruptcy or delisting).

ISS will not consider the definition to be problematic if it is in connection with a constructive termination (e.g., material reduction in compensation, title or role, etc.).

Incentive Metrics

Clarified that it does not advocate the use of any incentive metric over another (specifically TSR). ISS stated that the Board and Compensation Committee are best suited to determine the appropriate measures to incent executives to create long-term value for shareholders.

Updates due to Regulatory Changes

Updated its policy to reflect recent regulatory changes:

Elimination of 162(m) Tax Deductibility Exemptions: Will view pay programs negatively if a company shifts performance-based pay into fixed or discretionary forms of compensation.

Smaller Reporting Companies: Will continue to review the completeness of the disclosure. ISS will likely recommend “Against” an SOP vote if it is difficult to assess the compensation philosophy and practices.

Glass Lewis Policy Updates

Similar to ISS, Glass Lewis did not make changes to its pay-for-performance assessment for 2019. The firm did, however, clarify that its letter rating system (i.e., A, B, C, D and F) is not equivalent to the typical school grading system. In the policy update, Glass Lewis notes that receiving a “C” means that pay is aligned with performance. An “A” or a “B” indicates that the pay percentile is less than the performance percentile, and a “D” or an “F” means that the pay percentile is higher than the performance percentile.

Glass Lewis noted three voting policy updates related to compensation and diversity:

  1. If the Board does not have any female members, Glass Lewis will recommend a vote “Against” the Nominating Committee Chair and may extend the recommendation to other committee members, depending on factors including company size, state headquarters, and a company’s governance profile. Glass Lewis will take into consideration mitigating factors, such as a disclosed timetable for addressing female representation or an agreement with restrictions from a significant investor. The vote recommendation on Board diversity is in effect for 2019.
  2. Glass Lewis will generally recommend a vote “For” shareholder proposals that request additional information regarding employee diversity or the process for promoting diversity within the workforce.
  3. Glass Lewis will consider the addition of an excise tax gross-up, particularly if there is a prior commitment for no gross-up, as a factor that may influence a negative vote recommendation against the Compensation Committee.

In addition to these policy updates, Glass Lewis also noted that it will review the terms of a company’s recoupment or clawback policy. The mere presence of a policy that meets the legal minimum requirement will no longer suffice. Glass Lewis states that, at minimum, the recoupment should be triggered for a financial restatement. The lack of a comprehensive clawback policy may inform Glass Lewis’ overall opinion of a company’s compensation program.

Additionally, Glass Lewis provided insight on its views on front-loaded awards and contractual payments and arrangements, both summarized in the chart below. For all information related to Glass Lewis' 2019 voting policies visit http://www.glasslewis.com/guidelines/

Other Select Glass Lewis Policy Updates

Front-loaded Awards

Will review a company’s rationale for a front-loaded grant and will expect a commitment to not grant additional awards during the defined period of the award.

Contractual Payments and Arrangements

Will consider the amount of a “make whole” award as well as the process for determining the award size. Glass Lewis notes that the disclosure should include a meaningful rationale.

To evaluate severance and sign-on awards, Glass Lewis will review the size of the payment in relation to the amount of target compensation, amounts paid to other executives (including an executive’s predecessor) and the design of the payment.

Compensation Advisory Partners (CAP) examined 2017 executive pay levels and pay practices among 26 companies in the regional bank industry. The companies were divided into two groups based on asset size: $5B – $10B in assets and $10B – $20B in assets. This report analyzes pay levels and practices among the two sets of banks.

Highlights

The mix of fixed pay (base salary) vs. variable pay (incentives) is similar among both sets of banks; however, incentive plan metrics and mix of long-term incentive (LTI) vehicles used varies by group.

  • The smaller banks in our study focus on Earnings Per Share (EPS), Return on Assets (ROA), Return on Equity (ROE) and Return on Tangible Common Equity (ROTCE) in their annual incentive plans while the larger banks rely more heavily on Net Income and Efficiency Ratio
  • $5B – $10B banks tend to place more emphasis on time-based restricted stock, whereas $10B – $20B banks weight performance-based LTI more heavily; there is limited use of stock options among both groups
  • $10B – $20B banks are more likely to cap performance-based LTI plan maximums below 200%, reflecting a trend among much larger financial institutions which have limited upside in their performance plans due to regulator input. Among the $5B – $10B banks, caps of 200% of target are more prevalent

CEO Compensation

As is the case in most industries, CEO compensation generally increases as the size of the bank increases; larger banks have more stringent regulatory requirements, tend to offer a broader range of services, and may be exposed to higher levels of risk. The range between the 25th percentile and 75th percentile for CEO pay among the $5B – $10B in assets banks is very narrow, which is likely driven by the smaller spread in asset size ($5B) compared to the larger group ($10B).

2017 CEO Target Compensation

Asset Size

$5B – $10B

$10B – $20B

Pay Component

25th %ile

($000s)

Median

($000s)

75th %ile

($000s)

25th %ile

($000s)

Median

($000s)

75th %ile

($000s)

Base Salary

$613

$700

$737

$700

$780

$916

Bonus ($)

$321

$450

$568

$450

$701

$876

Bonus (% of salary)

55%

70%

80%

70%

85%

100%

Target Total Cash

$943

$1,200

$1,325

$1,291

$1,519

$1,577

LTI ($)

$453

$567

$745

$588

$1,117

$1,574

LTI (% of salary)

70%

81%

113%

84%

121%

164%

Target Total Direct

$1,469

$1,655

$1,924

$1,769

$2,694

$3,261

The relationship between fixed and variable incentive pay is similar across the two groups of banks. For CEOs in our sample, base salary (fixed pay) represents approximately 40% of total compensation, while incentives (variable pay) represent 60% of total compensation. In our experience, this contrasts with the banks over $20B in assets, where variable pay often comprises over 75% of the total pay mix. As salaries generally fall within the same range ($600K – $900K) among all banks studied, the differences in dollar amounts come largely in the form of increased long-term incentives, where the median LTI as a percent of salary is 81% for the $5B – $10B banks, compared to 121% for the $10B – $20B banks.

37%39%26%25%37%36%0%10%20%30%40%50%60%70%80%90%100%$10B - $20B$5B - $10BCEO Pay Mix (by Asset Size)BaseBonusLTI

Pay Practices

Annual Incentive Plans

Most companies in our study use “goal attainment” annual incentive plans. These are plans in which the company compares actual results to pre-established metrics with set weightings, leverage, and performance goals to determine incentive funding. Nearly a quarter of the companies instead use “discretionary” annual incentive plans, wherein companies consider a wide range of performance results — financial, strategic and/or individual performance — to determine incentive payouts, with no specific formula to determine earned awards. This approach allows a Compensation Committee to consider not only annual performance results, but external or internal factors influencing such results and adjust as appropriate.

Annual Incentive Plan – Metrics

Companies with Goal Attainment Plans

Among the $5B – $10B banks, EPS is the most prevalent metric followed closely by return measures (particularly ROA, ROE / ROTCE). Notably, the larger banks’ most prevalent metrics are asset-related metrics followed by net income and efficiency ratio. The larger banks tend to use metrics that emphasize more than just profitability and incentivize how efficiently the bank utilizes its resources to generate a profit and operate the business, while incorporating metrics that measure the underlying profitability.

Strategic goals are not prevalent in either group; only three banks, all in the $10B – $20B group, include strategic initiatives tied to the technology strategy or diversity and inclusion. These priorities are likely being discussed at all banks, but, companies and committees may shy away from including them in incentive plans as it is challenging to set measurable goals. Therefore, they must rely more heavily on discretion.

46%31%31%23%15%8%8%15%46%23%23%31%31%46%38%62%15%15%31%31%0%10%20%30%40%50%60%70%EPSROAROE / ROTCENet IncomeEfficiencyRatioAsset Ratio /QualityLoansDepositsOtherFinancialMetricsStrategicGoalsAnnual Incentive - Metric Types (by Asset Size)$5B - $10B$10B - $20B

Notes: Other Financial Metrics include Earnings Before Income Tax (EBIT)/Op. Income, Net Interest Margin, Non-Perf. Assets, Total Shareholder Return (TSR), Core Non-Interest Income, Charge-Offs, Operating Expense, Regulatory Criteria, Revenue, Price-to-Book Ratio, Non-Interest Expense, Dividend Increase, Fee Income Growth.

Long-Term Incentive Plans

Mix of LTI Vehicles

For CEOs among the $10B – $20B banks, performance-based LTI represents 60% percent of the LTI mix. This contrasts with $5B – $10B banks, where time-based restricted stock represents 60% of the mix. Stock options account for less than 5% of total mix (only about 10% of companies use them) for all banks in our sample. The $10B – $20B banks’ LTI is more comparable to general industry, where performance-based equity accounts for about two-thirds of total LTI mix; however, we see much less use of stock options in the regional banking industry than in the broader market. Regulators view stock options as risky, as the value can be realized based on macro-economic conditions, rather than company-specific events or financials and many financial services companies have decreased or eliminated the use of stock options entirely.

4%3%35%61%61%36%0%10%20%30%40%50%60%70%80%90%100%$10B - $20B$5B - $10BAverage CEO LTI Mix (by Asset Size)Stock OptionsRS/RSUPerformance Plan

Performance Plan Leverage

Among the $5B – $10B group, the most prevalent upside leverage on performance plans is 200% of target, similar to general industry. For the $10B – $20B group, 150% and 200% of target are equally prevalent. Capping performance plans at 150% of target is common among banks over $20B in assets, as increased scrutiny from regulators led to a practice of reduced upside leverage. While the $10B – $20B banks have followed to some extent, most of the $5B – $10B and nearly half of the $10B – $20B companies have maximums of 200% of target.

Performance Plan Maximum Prevalence

Asset Size

< 150%

150%

>150% – <200%

200%

$5B – $10B

14%

14%

0%

72%

$10B – $20B

0%

45%

10%

45%

Long-Term Incentive Plan Metrics

86%43%29%14%14%14%29%31%38%31%38%8%8%15%0%10%20%30%40%50%60%70%80%90%ROCE / ROTCETSRROA / ROTAEPSBook ValueAsset Ratio /QualityOther FinancialMetricsLong-Term Incentive Metrics (by Asset Size)$5B - $10B$10B - $20B

Note: Other financial metrics include Loan Growth, Tier 1 Capital Ratio, Efficiency Ratio, Price-to-Book Ratio; Prevalence is shown for companies that have LTI that use performance metrics.

The most prevalent metric in the LTI plan, used by nearly all $5B – $10B banks is Return on Common Equity (ROCE) / ROTCE followed by TSR. Among the $10B – $20B banks, TSR and EPS are the most common metrics, followed by return metrics. In our experience, the use of relative TSR in performance plans is a majority practice for banks over $20B in assets.

CEO Pay Ratio

As expected, the pay ratio correlates with the size of the bank, with the $10B – $20B banks having higher ratios at median and overall. Among the $5B – $10B banks, the median CEO pay ratio was 35:1, and almost doubles to 64:1 among the $10B – $20B banks. 2018 was the first year of CEO pay ratio disclosure which received much less attention overall than anticipated.

Conclusion

Overall, asset size has a significant impact on pay practices, particularly in banks with less than $20B in assets. The $10B – $20B banks generally have similar pay practices to their larger counterparts. On average, all banks in our sample have a similar total pay mix; however, annual incentive and LTI plan metrics, LTI mix, and LTI plan leverage vary. While the banks over $20B in assets have made significant pay practice changes in the post-financial crisis era, not all have cascaded down to banks less than $20B in assets. Regardless of size, we are seeing banks continue to focus on aligning pay and performance with an increased focus on strategic priorities. Bank boards today are discussing how to remain competitive, including how to enhance the customer relationship and to keep up with the digital transformation the industry is undergoing. We expect more boards to start to consider implementing strategic metrics in incentive plans in order to incentivize executives to enrich the customer experience and implement digital strategies.


For questions or more information, please contact:

Kelly Malafis Partner
kelly.malafis@capartners.com 212-921-9357

Shaun Bisman Principal
shaun.bisman@capartners.com 212-921-9365

Ryan Colucci Associate
ryan.colucci@capartners.com 646-486-9745

Joanna Czyzewski Associate
joanna.czyzewski@capartners.com 646-486-9746

Whitney Cook and Joshua Hovden provided research assistance for this report.


Appendix: Regional Banks

Banks with Assets $5B – $10B

  • Boston Private Financial Holdings, Inc.
  • Brookline Bancorp, Inc.
  • First Busey Corporation
  • First Foundation Inc.
  • First Merchants Corporation
  • Independent Bank Corp.
  • Lakeland Bancorp, Inc.
  • LegacyTexas Financial Group, Inc.
  • Mercantil Bank Holding Corporation
  • Opus Bank
  • Pacific Premier Bancorp, Inc.
  • Seacoast Banking Corporation of Florida
  • Tompkins Financial Corporation

Banks with Assets $10B – $20B

  • BancorpSouth Bank
  • Bank of Hawaii Corporation
  • Berkshire Hills Bancorp, Inc.
  • Cadence Bancorporation
  • CenterState Bank Corporation
  • First BanCorp.
  • First Midwest Bancorp, Inc.
  • Great Western Bancorp, Inc.
  • Home Bancshares, Inc. (Conway, AR)
  • MB Financial, Inc.
  • Old National Bancorp
  • Trustmark Corporation
  • United Bankshares, Inc.

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

Upcoming Events See All

Feb 27, 2020

NJCA: Preparing for the 2020 Proxy Se...

Parsippany, NJ

Sr. Associates Roman Beleuta & Ryan Colucci will lead a discussion ...

  • Roman Beleuta
  • Ryan Colucci

Mar 04, 2020

Oil & Gas Society: Women in Energy

Houston, TX

Partner Chris Earnest will join a panel to discuss the increasingly...

  • Christopher Earnest

Jun 03, 2020

Equilar: Executive Compensation Summit

San Diego, CA

Partner Dan Laddin plans to lead a discussion about the ongoing qua...

  • Christopher Earnest
  • Daniel Laddin