Compensation Advisory Partners (CAP) assessed human capital actions taken by companies in the Financials sector in response to the COVID-19 pandemic. Key findings include:

  • The Financials sector was moderately impacted by the COVID-19 pandemic, with 27% of companies in the S&P Composite 1500 Index taking human capital actions.
  • Banks, which often have retail operations, reported the most actions (35%) – many of which were positive for employees, such as expanded time off and healthcare benefits, and one-time bonuses and additional pay for on-site workers
  • The five most prevalent human capital actions by Financial Sector are expanded benefits programs, one-time bonuses for non-executives, additional payments for on-site employees (non-executives), reducing CEO base salary, and guaranteed pay continuity for non-executives
  • Executive salaries were reduced, particularly in Diversified Financials and Insurance:
    • Median salary reductions were 30 percent for chief executive officers (CEOs), while median salary reductions for other executives were 20 percent.
    • For boards of directors, pay was cut by a median of 28 percent.

The PDF of the report provides additional data for the Financials sector.

The human capital actions that CAP is tracking include pay cuts; changes to annual and long-term incentives; furloughs; workforce reductions; suspended 401K matches; enhanced health and welfare benefits; additional pay for frontline workers; pay continuity; and workforce expansions. CAP will continue to monitor corporate public announcements of COVID-19 actions.

This report examines 2019 compensation and financial performance across two segments of the insurance industry, including seventeen of the largest Property & Casualty (P&C) and Life & Health (L/H) Insurance companies. 2019 median revenue of these companies was approximately $22B. CAP focused on 2019 financial performance, CEO pay trends and current industry dynamics, including the impact of the COVID-19 pandemic.

Key Takeaways

2019 Pay and Performance. Bonus payouts for insurance company CEOs continued to be above target and commensurate with good financial results and strong total shareholder return in 2019.

Current Environment. 2020 started strong before the COVID-19 pandemic significantly impacted economies with stay at home orders and travel bans. Insurance companies were generally less impacted than other companies that had to take more extreme actions to stabilize business.

Looking Ahead. The COVID-19 pandemic is expected to result in changes in lifestyles and consumer behaviors. We do not believe this will lead to major overhauls in executive compensation programs among insurers. Most companies will make minor changes to their programs, and the primary focus will be on diminishing the impact of future uncertainties on compensation outcomes.

2019 Performance: Another Good Year

The insurance industry saw growth results generally similar to 2018. Companies in our study experienced 5% median revenue growth, coupled with 6% operating income growth in 2019. Median TSR was strong (+25%), a noticeable improvement from 2018; however, the sample did lag the median TSR of the S&P 500 companies of 30%.

The P&C industry generally experienced a better year than the L/H companies in our sample. Catastrophe (CAT) losses were down again in 2019, helping drive better performance. Operating income increased for all the P&C companies in the sample, with a median increase of 23% compared to 18% in 2018. CAT loss volatility continues to impact performance results for each company.

L/H company performance in terms of growth was consistent with the prior year, with a median revenue increase of 3.5% and operating income growth at 1.2%. Contrary to expectations for 2019, the industry experienced two interest rate decreases during the year, which depressed sales of certain products. Despite flat performance, TSR results were strong at +20% at median.

P&C Financial Performance

  • Median revenue growth of 7.9% in 2019 was similar to 2018 median growth of 5.5%.
  • Operating Income increased by 23% at median, higher growth compared to 2018.
  • Similar to prior years, CAT losses had mixed impact on individual company results; CAT losses were down for all companies, nearly 40% at median.
  • Median Operating ROE of 11.2% increased 0.9% compared to last year.
  • Net Investment Income increased 11.2% at median, compared to 2018 growth of 4.5%.

L/H Financial Performance

  • Revenue increased by 3.5% at median, similar to 2018.
  • Operating income was flat compared to last year (+1.2%), a decline from 2018 growth at 18%.
  • Median Operating ROE of 12.8% declined slightly from prior year.


Median Revenue Growth

Median Op. Income Growth

Median Op. ROE Improvement

Median TSR

Property & Casualty





Life & Health





All Insurance





2019 CEO Pay For Performance: Bonuses Pay Out Above Target

CEO Bonuses

Median Annual Incentive Payouts (% of Target)

Median Annual Incentive Payouts (% of Salary)







P&C (n=8)







Life and Health (n=9)







Total Sample (n=17)







Executive bonus payments in the insurance industry were above target again in 2019, although to a lesser degree than 2018.

Property & Casualty: 2019 was another strong year for the P&C industry. All eight companies experienced positive operating income growth. Performance results for P&C companies resulted in CEO bonuses as percent of target for 2019 that were consistent with prior years. On a dollar value basis, bonus payouts increased by 5% year over year (driven by small increases in salaries and target bonus opportunities).

Life & Health: Modest revenue growth and flat operating income growth for 2019 resulted in reduced bonus payouts for 2019. While payouts are still above target, they were closer to target than in prior years, reflecting financial results.

2020 Developments and Expectations for 2021

This year, the COVID-19 pandemic has led to significant volatility in financial markets, hampered growth for many companies, and transformed social behaviors. This section assesses the impact to-date and future expectations for insurance industry executive compensation and performance.

S&P 500 Performance (through 5/31/2020). Year-to-date, the S&P 500 index has been volatile. Performance was strong before the COVID-19 pandemic disrupted the economy and financial markets. At its highest point on February 19, the index was up 4.8%. Just a little over a month later, on March 23, the index loss was 30.7% for the year. While certain industries were impacted more than others, all industries were down for the year. As the CARES (Coronavirus Aid, Relief, and Economic Security) Act agreement got closer to being passed, markets started rebounding late March. The act will ultimately inject over $2 trillion into the US economy. Despite record unemployment claims, the S&P 500 index recouped most of the losses by the end of May.

S&P 500 Insurance Sector TSR. Insurance companies in the S&P 500 index tracked the index at both the height of the market in February, and the bottom of the market on March 23. As the market began recouping losses, insurers recovered to a lesser degree than other industries. We believe this has been driven by investor sentiment on profitability expectations for insurers due to lower interest rates, increased short-term disability and mortality rates, and uncertainty around potential lawsuits related to business interruption.


2/19/2020 S&P 500 High

3/23/2020 S&P 500 Low


S&P 500 Index




Insurance Industry Group Median




Insurance Industry Rank vs. Other Industry Groups

6 of 24

13 of 24

19 of 24

COVID-19 Impact on Compensation. As it became apparent that the COVID-19 pandemic would have a more lasting impact on businesses, companies took significant actions to preserve liquidity and conserve costs. More than 200 companies in the S&P 500 have taken temporary compensation or human capital actions. The most prevalent action has been salary reductions for executives, with over 100 companies announcing such actions. The most impacted industries have been retail, consumer services and automotive.

The insurance industry has not been impacted as much as other industries that may have lost significant sources of revenue. As a result, we have seen very few insurance companies reduce compensation or significantly reduce the workforce on a temporary or permanent basis. Instead, many insurers, particularly P&C companies, have announced favorable actions directed at customers, including rebates on certain policies, suspension of policy cancellations for non-payment, and fee waivers for late payments, to help customers through the crisis and retain customer loyalty. Some companies also committed to no layoffs and expanded employee benefits, such as additional paid leave and travel reimbursements for essential employees.

Developments in the Insurance Industry. The impact of the COVID-19 pandemic has been far reaching, and it is unclear what the long-lasting behavior changes will be on daily lives, work habits, and consumer preferences. For insurance companies it will be important to correctly plan for such changes in order to respond with new products, adjust pricing of current products and maintain appropriate digital platforms, among other things.

For the P&C industry, one area of change will likely include revisions to workers compensation insurance and how it applies to the increasing number of telecommuters. Further, P&C insurers have already been impacted by pricing on auto insurance. Incident rates have currently declined as Americans stopped commuting to work and reduced leisure travel. It is not clear if this behavior will continue, or if we will see a surge in driving when COVID-19 is perceived to be more controlled. Enterprise cybersecurity is also becoming more important with millions working from home and creating needs in cyber liability insurance products. In Life and Health insurance companies, the extremely low interest rate environment has forced some insurers to make changes to product offerings, reprice products, turn away certain customers, and increase premiums. The fast pace of change in products is driven in part by increased demand in response to the COVID-19 pandemic. Some life insurers reported over a 20-30% jump in sales in the months of March or April, yet life insurers are also expecting increased claims (e.g., short-term disability and mortality claims) in the remainder of the year, which will put pressure on profitability.

Uncertainty in the industry is also coming from a potential issue around business interruption policies. Many property policies-in-force specifically exclude viruses. For those that do not, interpretation exists around the requirement for physical damage. There is increasing pressure suggesting that insurers may be expected to cover some of the loss from the pandemic, and pressure to retroactively change policies to cover such losses. Lawsuits have followed, with preliminary arguments favoring both sides of the issue. If insurers are ultimately required to change outstanding contracts, the financial impact on the industry could be significant.

2020 Performance Expectations. In light of the expected changes among P&C and Life Insurance companies, we expect financial performance in 2020 to be lower and impact compensation accordingly. Companies will likely pay below target incentives (with just a few falling below threshold and paying no incentives to executives and a few paying above target), yet performance and bonus payouts will vary significantly depending on the line of business.

We believe companies will adjust performance results for COVID-19 to varying degrees. Some will adjust for direct costs of COVID-19 if quantifiable. For example, if companies helped employees with costs of establishing home offices, those costs are easily identifiable and reasonable to exclude as unplanned costs. Some companies will take a more holistic assessment and consider not only financial performance but also how well the company and senior leadership responded in the crisis. It is fairly certain that Compensation Committees will use more discretion (if allowed under the plan) when determining current year bonuses. For long-term incentives, we do not expect many changes to performance goals on outstanding awards, yet some COVID-19 related adjustments to performance will likely be applied when performance periods are completed.

Implications on 2021 Executive Compensation. The COVID-19 pandemic will result in companies in most industries evaluating their incentive compensation plans to determine if any potential design changes should be made on a go forward basis, to ensure that the incentive plans continue to be relevant and motivational during the economic downturn and period of uncertainty. Some of the incentive design changes companies may consider, include:

 Annual Incentive Plans

Long-term Incentive Plans

Use of wider performance scales around target goals, which may lead to less volatility in payouts

Increased use of time-based restricted stock/units, given its certainty and retentive aspect

Increased weighting on (or introduce) individual, strategic or ESG performance components

Adopting relative performance measures (primarily TSR) or increasing the weight of relative measures

Greater degree of (informed) discretion used in approving final payouts

Potentially shorter performance periods for performance based LTI to de-risk the overall incentive program. In periods of uncertainty, a longer performance period exposes participants to greater risk of awards not being earned and makes goal setting more challenging.

We do not expect insurance companies to make sweeping changes to their incentive programs due to the COVID-19 pandemic, yet companies will likely make some changes depending on the expected length and severity of the economic downturn. We anticipate that shareholders will look for parity in treatment between the broader population and executives. While shareholders may be understanding of the significant business impact related to COVID-19, we are confident they will still look for strong business rationale behind pay program decisions, even if original performance objectives have been reconstituted. As companies forge ahead through the challenges presented this year, we also believe it is a very opportunistic time to reassess programs and potentially redefine performance expectations and accountability at both the corporate and individual executive level.

For questions or more information, please contact:

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

Roman Beleuta Principal
[email protected] 646-532-5932

Joanna Czyzewski Senior Associate
[email protected] 646-486-9746

Brooke Warhurst provided research assistance for this report.

Insurance Sample for Pay for Performance Analysis:

P&C Companies

  • Allstate Corporation
  • American International Group, Inc.
  • Assurant, Inc.
  • Chubb Limited
  • CNA Financial Corporation
  • Hartford Financial Services Group
  • Progressive Corp.
  • Travelers Companies, Inc.

Life & Health Companies

  • Aflac Incorporated
  • Genworth Financial, Inc.
  • Globe Life
  • Lincoln National Corporation
  • Manulife Financial Corporation
  • MetLife, Inc.
  • Principal Financial Group Inc.
  • Prudential Financial, Inc.
  • Unum Group

This report examines 2018 compensation and financial performance across two segments of the insurance industry, including seventeen of the largest Property & Casualty (P&C) and Life & Health (L/H) Insurance companies. 2018 median revenue of these companies was approximately $22B. CAP focused on key compensation trends, financial performance, and industry dynamics affecting pay practices within the industry.

Key Takeaways

  • Insurance industry bonuses for 2018 were down compared to 2017 bonuses, however payouts were still above target.
  • 2018 performance results indicated another strong year for insurance.
  • Annual incentive plans are slowly beginning to incorporate strategic objectives, including environmental, social and governance (ESG) issues, in bonus determinations. We expect to see increased focus on strategic measures in annual incentive plan designs.
  • Long-term incentive practices remained almost unchanged since 2014 in terms vehicle prevalence and mix of awards.

2018 Performance: Solid Financial Results

The insurance industry overall generally experienced stronger financial performance in 2018 compared to 2017. Companies saw higher revenue growth, at a similar pace with 2017, while Operating Income results were more favorable. The stronger results however did not produce shareholder returns in line with financial results. Total shareholder returns of -17% at median for the companies studied was three times lower than the S&P 500 median of -6%, indicating a skeptical shareholder outlook for the insurance sectors.

The P&C industry experienced higher revenue growth in 2018. As far as profitability, Operating Income increased for all but two companies studied, and the median increase was 17.7% compared to 11.1% in 2017. Higher profitability was partly driven by lower catastrophe (CAT) losses in 2018, which declined by approximately 25%, but were still high, because of increased number of wildfires. Climate change has introduced additional uncertainty for property insurers and CAT loss volatility continues to have the potential for significant impact on results.

L/H companies also performed well but revenue only grew 2.8% at median (not a significant improvement compared to prior year). Operating Income results were stronger for the majority of companies. Shareholder sentiment resulted in a TSR decline of 23%, which was impacted by the continued flattening of the yield curve, fee pressure from asset management, and constant/slow increase in inflation.

P&C Financial Performance

  • Revenue growth of 5.5% at median in 2018 outpaced 2017 growth of 4.6% at median.
  • Operating Income increased by 17% at median, higher growth compared to 2017. Similar to prior years, results varied by company based on the degree of CAT losses.
  • Median Operating ROE of 11% improved by 130 basis points.

L/H Financial Performance

  • Revenue increased by 2.8% at median, in line with the prior year.
  • Operating income grew 17.3% at median, a meaningful increase from 11% in 2017.
  • Median Operating ROE of 13.5% improved by 60 basis points.

2018 CEO Pay For Performance: Bonuses Continue to Align with Performance

CEO Bonuses Median Annual Incentive Payouts (% of Target) Median Annual Incentive Payouts (% of Salary)
2018 2017 2016 2018 2017 2016
P&C (n=8) 135% 142% 87% 409% 396% 189%
Life and Health (n=9) 125% 138% 120% 281% 300% 264%
Total Sample (n=17) 125% 138% 100% 283% 318% 258%

Property & Casualty: 2018 was a good year for the P&C industry. Total CAT losses, while representing an approximate 25% (favorable) decrease from 2017, approximated $11B in 2018 for the 8 companies in our study. All eight companies had lower CAT losses in 2018 and only two of the eight P&C companies had a decrease in Operating Income for the year. Median Operating ROE showed a solid improvement of 1.3%

Results for P&C companies translated to CEO bonus payments as percentage of target that were generally in line with 2017 payments (approximately +/-10%). Three companies had an increase in bonus funding as percent of target that was between 10% and 25% and four companies saw a slight decrease between -3% and -10%. The actual median bonus value however, increased 6.7% for the eight companies driven by higher target bonuses or base salaries.

Life & Health: Although the L/H industry had good Operating Income growth in 2018, the somewhat flat revenue growth put pressure on bonus payouts. Bonus payouts as a percentage of target decreased and are generally back to 2016 levels, however still above target. Only two companies had higher bonuses in 2018 compared to 2017. The median bonus value decreased 16.7% for the nine companies.

1-Year Pay vs. Performance

  Median Revenue Growth Median Op. Income Growth Median Op. ROE Improvement Median TSR Median Bonus Payout Change
Property & Casualty 5.5% 17.7% 1.3% -10.4% 6.7%
Life & Health 2.8% 17.3% 0.6% -23.2% -16.7%
All Insurance 3.6% 17.3% 0.9% -17.2% -0.2%

Directionally, bonus funding was slightly lower compared to 2017, yet still above target. Above target payouts are in line with overall good financial results.

Annual Incentive Plans

Annual bonuses for the companies in the study were generally based on financial metrics tied primarily to short-term profitability. The most common annual incentive financial metrics among our sample include Operating Income (used by 82% of cos.), followed by Operating ROE (41%) and Revenue/Premiums (35%).

  Most Prevalent Annual Incentive Plan Metrics
  Metric #1 Metric #2 Metric #3
Property & Casualty Op. Income/EPS (63%) Op. ROE (38%) Combined Ratio (38%)
Life & Health Op. Income/EPS (100%) Revenue/Premiums (44%) Op. ROE (44%)
All Insurance Op. Income/EPS (82%) Op. ROE (41%) Revenue/Premiums (35%)

Approximately 70% of companies in the sample include an assessment of individual or strategic performance in the determination of CEO bonuses. While most of these companies use a more holistic and subjective review of individual performance, three companies fund a discrete portion of the bonus (between 10% and 25%) based on specific strategic goals. The goals disclosed by these companies include customer experience/satisfaction, technology milestones, employee retention, broader ESG measures (including diversity and inclusion).

Companies design their plans to reward executives for financial results that meet pre-established goals and often make adjustments to financial results for events outside the company’s control. This is not unique to companies in the insurance industry. Insurance companies continue to employ certain approaches to mitigate volatility in financial results and ensure that incentives reflect results controllable by, and reflective of, management actions and decisions. For example, a few P&C companies use budgeted CATs or protective collars around planned CATs or investments to determine incentive plan results, and some others use a more discretionary approach to funding incentives to account for external factors.

More broadly in the market, strategic measures, with specific focus on ESG issues, are becoming more prominent in annual incentive plans. The shift towards a focus on ESG issues in executive incentives is partly driven by select shareholders, as well as continuously evolving state regulations that encourage companies to be more socially responsible. Boards are listening to these concerns and some companies have introduced measures in their incentive plans to support company efforts. Other companies are debating whether executives should be rewarded, through incentives, for becoming better corporate citizens or whether those goals should be implicit as part of company’s culture and vision.

We expect companies to continue to focus on non-financial measures in incentive plans that align with their long-term goals and priorities and support organizational change and culture. The focus on corporate social responsibility will increase and we believe companies will be under more external demands to take specific actions on such issues beyond financial results.

Long-Term Incentive Plans

All companies studied use long-term performance-based incentive plans. Performance plan awards generally represent at least 50% of the overall executive LTI program, and on average account for 61% of the CEO’s LTI program. Stock options and time-based RSUs are used by more than 50% of the sample and on average, each approximate 20% of the remaining LTI value.

CEO LTI Mix Other NEOs LTI Mix
RS/RSU Performance Plan Stock
RS/RSU Performance Plan
Property & Casualty 23% 12% 65% 22% 15% 63%
Life & Health 19% 23% 58% 21% 15% 64%
All Insurance 21% 18% 61% 22% 15% 63%

Since 2014, three companies in the study added time-based RSUs to their LTI vehicle mix. This increased the average RSU portion of LTI by approximately 5%, with a slight decrease in the stock option component.

CEO LTI Prevalence CEO LTI Mix
LTI Vehicle 2018 2014 2018 2014
Stock Options 65% 65% 21% 25%
RS/RSU 59% 41% 18% 12%
Performance Plan 100% 100% 61% 63%

Within performance plans, the most commonly used metrics include Operating ROE (71%) and Relative TSR (47%). Five of the eight companies using TSR include it as a discrete award component (approximately 50% of the award), and three companies use it as an award modifier. There has not been any significant shift in the use of TSR as a metric. Using a mix of a relative and absolute performance metric helps provide balance and can offset issues associated with setting three-year goals in a volatile industry. Unlike annual incentive plans, we have not seen adoption of individual or strategic performance in LTI awards.

  Most Prevalent Long-Term Incentive Plan Metrics
  Metric #1 Metric #2 Metric #3
Property & Casualty Op. ROE (50%) TSR (38%) Book Value (38%)
Life & Health Op. ROE (89%) TSR (56%) Op. Income/EPS (22%)
All Insurance Op. ROE (71%) TSR (47%) Book Value (29%)


The fundamentals for the industry have generally been strong so far into 2019. To date, CATs have been 20% lower among the companies studied vs. 2018, and returns for both the P&C and Life/Health segments have rebounded with year to date total shareholder return at approximately 30% and 20%, respectively. Like many industries however, companies will be impacted by interest rate declines and slower economic growth.

Transformation in the industry is significant and continues to require not only investment and innovation, but workforce skills and competencies that keep pace with the changing nature of the business. The insurance industry relies on data analytics, digitization of products and services, and a customer experience that is faster and more transparent. Companies are working to upskill existing talent, attract and retain new talent, and maintain a culture that supports workforce development and customer focus.

Compensation strategies need to be flexible with changing HR needs. Organizations are developing different pay schemes for specific, high demand talent (such as IT) and for specific businesses (such as online sales/distribution, and emerging niche businesses). As with all facets of HR, successful compensation programs will continue to require flexibility and adaptability, in addition to competitive and performance-based design.

For questions or more information, please contact:

Melissa Burek
[email protected]

Roman Beleuta
Senior Associate
[email protected]

Joanna Czyzewski
[email protected]

Brooke Warhurst provided research assistance for this report.

CAP’s Insurance Sample:

P&C Companies

  • Allstate Corporation
  • American International Group, Inc.
  • Assurant, Inc.
  • Chubb Limited
  • CNA Financial Corporation
  • Hartford Financial Services Group
  • Progressive Corp.
  • Travelers Companies, Inc.

Life & Health Companies

  • Aflac Incorporated
  • Genworth Financial, Inc.
  • Globe Life
  • Lincoln National Corporation
  • Manulife Financial Corporation
  • MetLife, Inc.
  • Principal Financial Group Inc.
  • Prudential Financial, Inc.
  • Unum Group

CAP examined 2017 compensation and financial performance across two segments of the insurance industry including eighteen of the largest Property & Casualty (P&C) and Life & Health (L/H) Insurance companies1. 2017 median revenue of these companies was approximately $19B compared with 2016 median revenue of $18B. The study focused on performance and pay trends and industry dynamics affecting pay practices within the industry.

1 See Exhibit 1 for list of companies included.

Key Takeaways

  • Insurance industry bonuses for 2017 performance were up year over year in spite of major catastrophes that weighed on the P&C industry.
  • Annual incentive plans in the P&C industry take varying approaches to deal with the impact of catastrophes on earnings.
  • We expect to see increased focus on digital innovation and improved customer experience in annual incentive plan designs.
  • Long-term incentives continue to emphasize performance plans with Operating Income, ROE and Relative TSR as the primary measures used.

2017 Performance: Financial Results Improve Despite Industry Challenges

The insurance industry saw an uptick in financial performance in 2017 compared to 2016. While 2017 presented some significant challenges for certain segments of the industry, revenue and operating income growth overall were stronger in 2017, and ROEs overall were flat, though stronger in some industry segments. Notwithstanding such improvements, the insurance industry slightly underperformed the broader stock market, with median TSR of 16%, just below the S&P 500 median TSR of 20%.

The P&C industry experienced record catastrophe (CATs) losses and continued to be challenged by loss frequency and severity. Some of the earnings pressure was eased however, by improved investment income results, operational improvements, and adequate capital levels that helped companies withstand losses.

L/H companies did not experience as strong of an interest rate environment as originally expected yet did benefit from modest economic improvement/healthy economy and continued demand for certain products. L/H companies were challenged by the uncertainty surrounding the U.S. DOL’s fiduciary rule, weaker annuity sales, and changing consumer preferences.

P&C Financial Performance

  • Revenue growth of 4.6% at median for the P&C businesses this year outpaced prior year increase of 2.6% at median.
  • Operating Income increased by 11% at median, an improvement over 2016. Results varied dramatically by company however, with the degree of CAT losses impacting profitability.
  • Operating Income ROE was approximately 8%, reflecting a decline versus the prior year, yet ROE increased for five of nine P&C companies.

L/H Financial Performance

  • Revenue increased by 2.5% at median, in line with the prior year increase.
  • Operating income increased 11% at median, an improvement from 2016.
  • Operating Income ROE improved from 12% to 13%, with stronger ROE at seven of nine L/H companies.

2017 CEO Pay for Performance: Bonuses Align with Performance

CEO Bonuses Median Annual Incentive Payouts (% of Target) Median Annual Incentive Payouts (% of Salary)
2017 2016 2015 2017 2016 2015
P&C (n=9) 170% 74% 126% 393% 225% 245%
Life and Health (n=9) 142% 120% 93% 300% 264% 186%
Total Sample (n=18) 145% 100% 102% 309% 254% 243%

Property & Casualty: 2017 was a turbulent year for the P&C industry; notably, CAT losses increased 122% at median for the companies in our study. While profitability was impacted at some companies more than others, 2017 results were generally stronger than 2016. Five of the nine P&C companies had an increase in Operating Income for the year.

Results for P&C companies translated to an increase in CEO bonus payments from 225% of salary in 2016 to 393% of salary in 2017. In all but one company, CEO bonuses changed in the same direction as the change in Operating Income results; five of nine companies saw bonuses increase, while four were flat or down. The median bonus increase was 36% compared to an overall decrease last year.

Life & Health: The L/H industry delivered positive results in 2017, somewhat stronger than in 2016. Operating Income increased in seven of the nine companies. After seeing an increase in bonuses for 2016, L/H companies saw bonuses increase again in 2017 from 264% to 300% of salary at median, and all but two companies had an increase in CEO bonuses over the prior year. The median bonus increase was 15% overall.

5% 3% 4% 11% 11% 11% 13% 18% 16% 36% 15% 18% 0% 5% 10% 15% 20% 25% 30% 35% 40% Property & Casualty Life & Health All Insurance 1-Year Pay vs. Performance Revenue Growth Net Op. Income Growth TSR Annual Bonus Change

Despite some challenges in certain industry segments, the general direction of CEO bonuses was even more aligned with financial performance results among insurance companies in 2017 vs 2016.

Annual Incentive Plans

The financial metrics underlying annual incentive plans are often tied to short-term growth and profitability. Accordingly, the most common annual incentive financial metrics used by companies in our study are Operating Income (used by 83% of companies), followed by ROE (39%) and Revenue/ Premiums (39%). Approximately two-thirds of the companies in CAP’s sample include an assessment of individual performance in the determination of the CEO bonuses.

Most Prevalent Annual Incentive Plan Metrics
Metric #1 Metric #2 Metric #3
Property & Casualty Op. Income (67%) Op. ROE (33%) Combined Ratio (33%)
Life & Health Op. Income (100%) Revenue (56%) Op. ROE (44%)
All Insurance Op. Income (83%) Op. ROE (39%) Revenue/Premiums (39%)

Insurance companies can experience a great deal of volatility in their financial results from year to year, impacted by interest rates, catastrophic events, and regulatory changes, among other things. Further, gains/losses from various insurance products are realized over differing time periods and investments are longer term in nature.

Incentive plan payouts are generally driven by the degree to which financial results meet pre-established goals. To date, however, companies have employed various approaches to mitigate some of the volatility in financial results and ensure that incentives reflect results controllable by, and reflective of, management actions and decisions. A few select companies use budgeted CATs or a protective “collar” around CATs or investments to determine incentive plan results, and others use discretionary funding to allow for consideration of external factors.

In the future we expect to see greater use of performance measurement around what we classify as strategic objectives. These may include new business, strategic investments/ acquisitions, customer service, technology improvements/ capabilities, as well as diversity and risk management. Companies incorporate these criteria through an individual performance assessment and resulting award modification, or in some cases, by funding a small award component based on strategic or individual performance results.

In particular, we believe that innovation/digital capabilities and the customer experience, will increasingly be a part, albeit small, of incentive decisions. Measuring results and defining success in these areas is challenging, yet most companies are already having discussions around these critical issues.

Long-term Incentive Plans

A strong majority of insurance companies use long-term performance-based incentive plans. These performance plans account for at least 50% of the overall executive LTI program for all but one company, and on average they account for 62% of the CEO’s LTI program. Almost all companies use a 3-year performance period.

CEO LTI Mix Other NEOs LTI Mix
Stock Options RS/RSU Performance Plan Stock Options RS/RSU Performance Plan
Property & Casualty 19% 14% 66% 19% 16% 65%
Life & Health 19% 23% 58% 23% 21% 57%
All Insurance 19% 19% 62% 21% 18% 61%

The most commonly used metrics in long-term performance plans are Return on Equity (67%) and Relative TSR (56%), and the combination of ROE and Relative TSR is used by 39% of companies. The use of a relative metric (most often TSR) in conjunction with an absolute financial metric helps provide balance and can offset issues associated with setting three-year goals in a volatile industry.

Most Prevalent Long-Term Incentive Plan Metrics
Metric #1 Metric #2 Metric #3
Property & Casualty TSR (56%) OI ROE (44%) Book Value (44%)
Life & Health OI ROE (89%) TSR (56%) Op. Income (33%)
All Insurance OI ROE (67%) TSR (56%) Op. Income; Book Value (28%)

To date, we have not seen individual or ‘strategic’ performance considerations impact LTI award grant levels or payouts, as they do for many companies in the annual incentive plan.


We expect the insurance industry will continue to see improvements in performance in the near future. Insurance companies should benefit from the rising interest rates, a faster-growing economy, and a more business-friendly regulatory environment, including the recent developments around the DOL fiduciary rule.

The insurance industry is competitive however, and companies will increasingly need to compete not only on pricing and customer service, but also on the ability to tailor product offerings and delivery methods for the new generation of consumers. Consumers are becoming more tech savvy and may purchase many of their products and services online. Companies will need to focus on new methods of consumer outreach and improving their digital platforms.

While we expect the industry overall to continue to grow, some companies will struggle and some will thrive depending on their abilities to react to the shift in consumer demographics and demand preferences, to reach even greater operational efficiencies, and to respond to the need for digitalization. While most Compensation Committees strive for simplicity in pay programs, we expect companies to increasingly incorporate progress in key strategic areas in the annual incentive program given their importance. We also expect companies to continue to spend great effort on the goal setting process given the inherent volatility in the industry.

Additional Information – New CEO Pay Ratio Disclosure

Seventeen of the companies in CAP’s sample were required to disclose the ratio of their CEO pay to that of the median employee in 2018. The reported CEO pay ratios among CAP’s sample ranged from 84:1 to 301:1 with a median ratio of 178:1. Given company business models and the flexibility that companies have in the methodology/assumptions used to calculate the ratio, comparisons of ratios between companies are less meaningful. To date, institutional investors and proxy advisory firms have not used disclosed CEO pay ratios to inform their voting decisions. We may see some year-over-year comparisons in the second year of disclosure.

For questions or more information, please contact:

Melissa Burek Partner [email protected] 212-921-9354
Kyle Eastman Associate [email protected] 212-921-9370
Roman Beleuta Senior Associate [email protected] 646-532-5932
Joanna Czyzewski Associate [email protected] 646-486-9746

Kyle Clemenza provided research assistance for this report.

CAP’s Insurance Industry Sample

P&C Companies

  • Allstate Corporation
  • American International Group, Inc.
  • Assurant, Inc.
  • Chubb Limited
  • CNA Financial Corporation
  • Hartford Financial Services Group
  • Progressive Corp.
  • Travelers Companies, Inc
  • XL Group plc

Life & Health Companies

  • Aflac Incorporated
  • Genworth Financial, Inc
  • Lincoln National Corporation
  • Manulife Financial Corporation
  • MetLife, Inc.
  • Principal Financial Group Inc.
  • Prudential Financial, Inc.
  • Torchmark Corporation
  • Unum Group

Compensation Advisory Partners (CAP) examined 2016 pay levels and financial performance across two segments of the insurance industry including eighteen companies with median revenue of approximately $18B. The segments included Property & Casualty (P&C) and Life & Health (L/H) Insurance companies1. The study focused on performance trends and industry dynamics affecting pay practices within the industry.

2016 Performance: Strong Shareholder Returns With Mixed Financial Results

Mixed performance results marked 2016 for the insurance industry. While operating earnings for the industry declined by 5.6% at median, Total Shareholder Return (TSR) for the full year of 19% (at median) was more than 33% greater than the S&P 500 of 13%. The 2016 Presidential election positively influenced returns, as expectations for rising interest rates and the likelihood of a relaxed regulatory environment for the insurance industry under the new administration intrigued investors. In the 10 months prior to the election, our sample of insurance companies had returns on par with the S&P 500 (approximately 8% for both), however, in only 2 months after the election, the insurance industry had a median return of 9% compared to just 4% for the S&P 500.

P&C companies benefitted from expectations for a faster growing economy under the current Administration, though it remains unclear if the expected increase in product demand will actually offset industry-pricing challenges. Shareholders are optimistic at the prospect of increased interest rates and the impact they may have on the L/H business which relies heavily on spread-based products.

Median TSR

Pre-Election (1/1/16 – 11/8/16)

Post-Election (11/9/16 – 12/31/16)


(1/1/16 – 12/31/16)

P&C (n=9) 4% 9% 15%
Life and Health (n=9) 12% 9% 30%
CAP Total Sample (n=18) 8% 9% 19%
S&P 500 8% 4% 13%

P&C Financial Performance

  • Revenue growth for the P&C business rebounded this year by 2.5% vs. a decline of 1% in the prior year given an increase in demand
  • Operating Income decreased by 13% at median. Overall, generally benign loss trends and an absence of significant catastrophic losses were offset by a soft pricing cycle and declining auto insurance policies in force due to higher auto frequency claims, which hampered profitability
  • Correspondingly, Operating Income ROE decreased to 8% compared to 11% in 2015

L/H Financial Performance

  • Revenue increased by 3%, coming off of last year’s decline of 1%, as the economy continued to strengthen (at a modest rate) and investment income results were impacted favorably as interest rates began to rise
  • Operating Income increased 4% in conjunction with revenue growth, compared to a 2% decline in 2015
  • Operating Income ROE was maintained at 12%

2016 CEO Pay For Performance: Bonuses Align With Performance

2.6% 3.2% 2.9% -13.7% 4.1% -1.8% 14.9% 30.3% 18.6% -25.9% 7.9% -11.1% -30.0% -20.0% -10.0% 0.0% 10.0% 20.0% 30.0% 40.0% Property & Casualty Life & Health All Insurance 1-year Pay-for-Performance Revenue Op. Income Growth TSR Annual Bonus Change

Property & Casualty: 2016 was an interesting year for the P&C industry as Operating Income and related operational results declined but total shareholder returns were above those of the S&P 500. Investors moved to insurance company stocks after the election, anticipating changes that would potentially lift the industry. However, CEO bonuses generally reflect 1-year operational results and decreased at all P&C companies in our study, with a 26% decline at median. CEO bonuses paid out at approximately 75% of target at median in 2016, compared to 125% of target for 2015.

Life & Health: The L/H industry fared better in 2016 compared to the P&C industry. Revenue, Operating Income and TSR all grew year-over-year, which correlated with CEO bonus increases of 8% at median.

0% 1% 0% -26% 8% -11% 0% 6% 1% -2% 9% 0% -30% -25% -20% -15% -10% -5% 0% 5% 10% 15% Property & Casualty Life & Health All Insurance Median Change in Compensation (2016 vs. 2015) Base Salary Cash Bonus LTI Total Pay

Annual Incentive Plans

Annual incentive bonus payouts over the last 3 years have been volatile among P&C and L/H companies:

Median Annual Incentive Payouts as % of Target




P&C (n=9) 74% 126% 128%
Life and Health (n=9) 120% 93% 123%
CAP Total Sample (n=18) 100% 102% 132%

As the industry is impacted by external factors such as catastrophes, interest rates and foreign exchange rates, incentive plan goal setting can be challenging. Companies consider these industry dynamics when they are both designing annual incentive plans and determining payouts at the end of year.

28% of companies in our study maintain annual incentive plans that incorporate discretionary funding in some fashion. These companies consider a wide range of performance results — financial, strategic and/or individual — to determine incentive payouts. There is no specific formula to determine earned awards. This approach allows a company to not only consider the level of performance results each year, but to consider external or internal factors influencing such results and provide bonuses in line with controllable results, as determined to be appropriate.

Companies that utilize a “goal attainment” plan, in which the company compares actual results to pre-established performance goals to determine incentive funding, also have methods to address macroeconomic factors and industry volatility. Many companies build in adjustments to results for items such as catastrophes, foreign exchange rates or investment income results. A majority of the companies in our study make adjustments in at least one of these areas. Companies may do this by establishing a protective “collar” around a budgeted number (e.g., +/- 10% of budgeted CATs is the max included for incentive results) or excluding the results of an item completely (e.g., use of budgeted CATs vs. actual). Most companies also incorporate the ability to make individual performance considerations in determining final payouts. 75% of the companies with a goal attainment plan in our study allow for positive or negative modification to the award amount funded on financial results.

While companies will try to mitigate plan volatility, it is important to ensure alignment of executives with shareholders, and executive bonuses with performance. The alignment seen in 2016 executive bonuses and performance indicates that companies are striking a good balance between rewarding executives for results within their control and maintaining alignment with shareholders.

Long-term Incentive Plans

Insurance companies generally have been long-time users of performance-based LTI. All but one company weights performance plans at least 50% of the overall LTI program.

Stock Options RS/RSU Performance Plan Property & Casualty CEO LTI Mix 64% 56% 60% 69% 61% 65% 18% 24% 13% 23% 19% 21% 13% 18% 8% 23% 20% 22% Other NEOs LTI Mix Life & Health All Insurance

Despite strong use of performance-based LTI, setting longer-term performance goals can be challenging. All but one of the companies utilize a 3-year performance period in their long-term performance plan. In our study, the most commonly used metric is ROE (72% of companies), followed by relative TSR (50%), and the combination of ROE and TSR is used by 33% of companies. The use of a relative metric (TSR) in conjunction with a financial metric helps provide balance and can offset issues associated with setting three year goals in a volatile industry.

Incorporating a relative metric in a long-term performance plan did benefit companies in terms of 2016 payouts yet companies need to balance other considerations when designing their program. Ideally, companies will use metrics that are correlated with shareholder returns. Though as 2016 showed, outside factors can affect stock price and may or may not reflect underlying operational performance. Over a longer time, relative performance and TSR may prove to be a helpful design feature.


The insurance industry will continue to evolve over the next few years. Expectations of a faster-growing economy, a relaxed regulatory climate, uncertainty around healthcare, and higher interest rates will impact the industry.

The external landscape that insurance companies are competing in is evolving as well. For example, P&C companies will have to deal with the reality that driverless cars will continue to gain traction in the future and with it, companies will have to adopt relevant auto policies. L/H companies will benefit from new money investments if the Fed raises interest rates and the economy continues to improve. Uncertainty surrounding the DOL Fiduciary Rule has already influenced L/H companies as some have announced they will sell their broker-dealer networks.

The industry will certainly go through change in the upcoming years and insurance companies have to adapt to the environment accordingly. While these influences put pressure on maintaining responsible and competitive pay programs, the industry has already demonstrated they are able to provide compensation that is directionally aligned with performance and company objectives.

For questions or more information, please contact:

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

Eric Hosken Partner [email protected] 212-921-9363

Alex Stahl Associate [email protected] 646-486-9741

Joanna Czyzewski Associate [email protected] 646-486-9746

Kyle Clemenza provided research assistance for this report.

CAP’s Insurance Industry Sample

P&C Companies

American International Group, Inc.

The Allstate Corporation

The Travelers Companies, Inc.

Chubb Limited

Progressive Corp.

Hartford Financial Services Group

Assurant, Inc.

CNA Financial Corporation

XL Group plc

Life & Health Companies

MetLife, Inc.

Prudential Financial, Inc.

Manulife Financial Corporation

Aflac Incorporated

Unum Group

Genworth Financial, Inc.

Lincoln National Corporation

Principal Financial Group Inc.

Torchmark Corporation

1 See Exhibit 1 for list of companies included.

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.


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.


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

Spin-offs have been in the news for several years. Fully 60 spin-off transactions occurred in 2014, followed by another 40 spin-offs in 2015, with 13 involving S&P 500 companies.1 Spin-off activity continued to be newsworthy in 2016 with major spin-offs completed by Alcoa, Danaher, Emerson Electric, Johnson Controls, and Xerox. Spin-off activity will continue into 2017 with a number of pending transactions including major companies like Ashland, Biogen, Hilton Worldwide, and MetLife. The need to create shareholder value during a period marked by low returns from most asset classes is driving the spin-off activity. In some cases, activist shareholders have pushed companies to create value by breaking businesses into their component parts. When a business undergoes a spin-off, the human resource and executive compensation implications for executives at both the Parent Company (ParentCo) and the Spin-off Company (SpinCo) are very significant.

We have advised many companies as they worked through the spin-off process and we want to share some of what we have learned. As a starting point, we have identified four critical work streams for executive compensation in a spin-off:

  1. Establishing Transitional Compensation Arrangements (e.g., near-term retention plans)
  2. Understanding and/or Modifying Outstanding Compensation Arrangements (e.g., outstanding equity awards, severance and change in control agreements, benefit plans, etc.)
  3. Developing Going Forward Compensation Programs for SpinCo, equivalent in many ways to standing up a newly public company in an IPO
  4. Modifying Compensation Programs for ParentCo, as necessary to reflect new business focus and business scale

1. Establishing Transitional Compensation Arrangements

After deciding that a portion of the business is going to be spun-off, one of the first compensation decisions that needs to be addressed is how to structure incentive compensation programs for the company in the year of the spin-off. How complex this step is will depend on the timing of the spin-off in the fiscal year and the nature of the company’s annual and long-term incentive plans. A general principle is that if the spin-off has already been announced at the time design decisions are being made, SpinCo incentive compensation should be based primarily on SpinCo performance to provide better line-of-sight for SpinCo employees and to facilitate the transition.

Annual Incentive Plans

If the upcoming spin-off is a known event at the time that the annual incentive award is made, the transitional incentive plan can be simplified by ensuring that the annual incentive for SpinCo executives is tied 100% to SpinCo performance for the entire fiscal year. In this case, SpinCo executives will be paid an annual incentive based on SpinCo’s performance early in the fiscal year following the spin-off.

In some cases, the annual incentive award may already have been granted prior to the announcement of the spin-off. In such a situation, it is likely that the incentive plan for SpinCo employees will be based on a combination of ParentCo and SpinCo performance up to the time of the spin-off and then on SpinCo performance for the remainder of the year. This may require the company to establish SpinCo specific performance goals for the “stub period” from the completion of the spin-off to the end of the fiscal year. The performance measures for the “stub period” are typically the same performance measures used to assess SpinCo performance for the portion of the fiscal year prior to the completion of the spin-off.

Long-term Incentive Plans

Similar to the short-term incentive, if the company knows that the spin-off is going to take place during the fiscal year, there are design decisions that can help to facilitate transitioning the long-term incentive awards. For any performance-based awards (e.g., performance shares/units/cash), SpinCo employees should be granted awards that are based on multi-year performance objectives for the SpinCo. In some cases, companies will avoid making performance-based awards to SpinCo employees in the year of the transition because of the challenges in maintaining a consistent performance measurement approach before and after the spin-off.

If the spin-off is not a known event at the time that performance awards are made, there may be challenges in converting ParentCo performance awards into SpinCo performance awards at the time of the spin-off. In these cases, some companies will truncate the payout based on the ParentCo performance to date, at spin, and establish SpinCo goals for the remainder of the overall performance period. We will address this issue in greater detail in the next section on the treatment of outstanding awards following the spin-off.

Special Transition Compensation Programs

Most SpinCo employees are likely to view the spin-off as a positive event. Staff positions (e.g., finance, legal, human resources, etc.) will often have enhanced roles and responsibilities at the new company, given the stand-alone nature of the business. Line positions (e.g., business unit executives and staff) often feel that the spin-off provides them with a greater ability to impact business performance.

On the other hand, announcement of a spin-off creates uncertainty about the future prospects of the business. In addition, the SpinCo is a potential acquisition target, with the business potentially being sold rather than spun-off to shareholders. In many cases, it makes sense to review the severance protection in place for SpinCo staff in advance of announcing the spin-off. If there is a real chance that the business may be sold, enhanced severance protection may be needed to ensure that staff positions do not “jump ship”.

There may also be employee retention concerns at the ParentCo. While the spin-off is generally a positive event for SpinCo employees, spin-offs can create concerns for ParentCo employees. For ParentCo employees, a spin-off means working for a smaller company in the future, with a less complex and potentially less interesting job. In addition, the spin-off transaction will create additional work for all corporate staff positions as they set up the newly public company and continue to do their “day job”. For select ParentCo employees, a near-term retention bonus or short-term stock retention grant may provide recognition for their additional workload and focused efforts on preparing for a successful transaction, and help to keep them engaged in a stressful working environment. To the extent that certain corporate staff positions will no longer be needed following the spin-off, there may also be a need for enhanced severance for corporate staff.

2. Understanding and/or Modifying Outstanding Compensation Arrangements

As the company approaches the spin-off, a key compensation issue is how to adjust outstanding compensation arrangements to recognize that one company is breaking up into two companies. Decisions need to be made about what will happen to the company’s long-term incentive plans, as well as retirement plans and deferred compensation plans. For purposes of this discussion, we will focus on long-term incentive plans, as it is an area that is particularly critical for executive compensation.

The treatment of outstanding long-term incentives (particularly equity incentives), can be complex following a spin-off. There are several steps that need to be taken to transition awards, including review of the following:

  • What provisions are specified in the equity plan and equity award agreements?
  • Should the Committee apply discretion to modify the treatment of employees’ awards based on the circumstances of the transaction?
  • What is the preferred approach for converting ParentCo equity (i.e., ParentCo post-spin and SpinCo equity)?
  • What will be the timing of the conversion of equity?

Existing Equity Plan and Award Agreements

The first step in reviewing outstanding equity is to understand the treatment that the company’s equity plan and the individual award agreements prescribe for outstanding equity awards. A key issue to understand is what will happen to the awards held by employees of SpinCo. In many cases, the spin-off constitutes a termination of employment and, under ParentCo’s plans, unvested awards are forfeited at the spin-off.

It is important to understand the extent to which the prescribed approach impacts the bottom line of both entities. It is also important to work with internal and external counsel to ensure that there is a common understanding of the contractual rights of employees under the equity plan and award agreements.

Another key issue is whether the plan provides for the conversion of outstanding awards in a spin-off transaction. The plan document will likely include a section addressing a change in capital structure and transactions like a spin-off. In most cases, the Committee is required to convert vested awards to preserve value, but is afforded significant latitude in determining the details of the conversion.

Exercise of Compensation Committee Discretion

In our experience, most Compensation Committees do not want SpinCo employees to forfeit outstanding unvested equity as a result of a spin-off transaction. Forfeiture of previously awarded equity could have a serious impact on morale. One way to address this is to accelerate vesting in ParentCo equity or to provide for continued vesting post-spin. Alternatively, if the ParentCo’s Compensation Committee does not take action to keep SpinCo’s employees whole, then SpinCo’s Compensation Committee may need to take action following the spin-off. But it is important to keep in mind that each situation is different. If outstanding awards are underwater, the spin-off may be an opportunity to eliminate overhang on the stock.

Approaches for Conversion of ParentCo Equity

There are several approaches that are used in practice when addressing how to treat outstanding equity upon a spin-off. The following table provides an overview of the alternative approaches:




Employee awards are converted to equity in the company where they are employed. The participants of the equity plan who remain employed by ParentCo retain adjusted ParentCo equity awards. The equity plan participants who are employed by SpinCo receive converted SpinCo equity awards with same terms and conditions


Employees are treated like shareholders. Regardless of where the participant is employed following spin-off, outstanding awards of all equity plan participants are converted into both ParentCo and SpinCo equity at the same conversion ratio as shareholders, with the same terms and conditions as the original awards


A combination of the “Employment” and “Shareholder” approaches based on any of the following: (i) when the equity award was granted, (ii) where the equity holder is employed post-spin, (iii) when the equity award will vest, and/or (iv) the type of equity held at spin-off

Adjustment Only, No Conversion Approach

All employees retain adjusted ParentCo equity with same terms and conditions. Continued employment with SpinCo is treated as employment with ParentCo, for purposes of continued award vesting

While several approaches to conversion are used in practice, the Employee approach is the most consistent with the goal of aligning the executives of the company with the shareholders of the entity they support following the spin-off. Other approaches (e.g., shareholder) may attempt to recognize the efforts of employees, prior to the spin, given that such efforts contribute to the future business success of both entities, post spin. The hybrid approach is sometimes used in situations where there is a significant difference in the growth prospects of the SpinCo or ParentCo. (i.e., ParentCo is expected to have modest price appreciation potential and SpinCo has strong growth prospects). And it is sometimes the case that different treatments may apply to employees within one entity. For example, if the ParentCo hires a senior executive for SpinCo from outside the company, prior to the spin, their awards may convert using the Employee approach if they have minimal service at ParentCo, yet the Shareholder approach may be used for other employees.

For outstanding long-term performance share or unit/cash plans (typically with three-year performance cycles), practice is mixed, and the conversion approach used will depend on the length of time remaining in the outstanding award cycle, the performance measures used, whether a new program is put in place in SpinCo, and the type of SpinCo company structure. In many cases, ParentCo prorates outstanding LTI awards held by employees of SpinCo to reflect their time as an employee of ParentCo. The prorated awards held by SpinCo employees are then paid out based on the original performance criteria at the time payments are made to ongoing employees of ParentCo. Once employees have transferred to SpinCo, the remaining stub periods of each outstanding award may be paid out at the target award amount, or, in cases where the Committee of SpinCo wants to preserve a performance-based focus, they may establish new performance goals based on operational or stock performance of SpinCo. There are challenges associated with setting goals for these ‘interim’ performance periods, yet many companies will do so.

Retirement Programs. Agreement on the treatment of retirement programs, non-qualified deferred compensation (“NQDC”) plans and other benefits is a critical administrative decision. If ParentCo has a defined benefit plan, it must determine whether to transfer assets and liabilities of the pension associated with SpinCo employees to SpinCo. A decision on whether any applicable grandfathering of frozen plans/plan benefits will continue is also required. Non-qualified benefit programs are often only partially funded, or unfunded, and the amounts can be significant. Typically, employee accounts in any NQDC plan of ParentCo are transferred to a SpinCo plan for employees of SpinCo. Alternatively, SpinCo could receive a payout of the NQDC applicable balances. Plan provisions will dictate the course of action. Note that distributions in connection with a spin-off are generally not compliant with Section 409A of IRC, since a spin-off is not a separation of service for employees under 409A.

Health and Welfare Benefits. Generally, SpinCo is responsible for setting up new health and welfare programs and both ParentCo and SpinCo are responsible for claims incurred against the respective plans post-spin. Certain programs such as retiree medical, however, may require a determination of how to allocate liabilities to SpinCo (e.g., for current terminated employees, or just future retirees). Decisions on allocating liabilities related to LTD payments, accrued vacation, COBRA, workers’ compensation, etc. may also need to be made depending on the programs of ParentCo.

Severance and Change in Control (“CIC) Benefits. A spin-off could trigger a CIC depending on the provisions of ParentCo’s various plans. While many benefits arising from a CIC are only paid after a “double trigger” (i.e., they are only paid or vested if a termination of employment occurs in connection with the CIC), certain benefits may be accelerated or payments may be triggered immediately. As a result, severance payments could become due to employees transferring to SpinCo. The companies need to determine if any severance obligations apply when employees transfer to SpinCo and who bears the responsibility for such obligations. Note however, that in many transactions, outstanding awards are assumed by SpinCo, in which case, payments would not be accelerated, nor would any benefits be distributed.

3. SpinCo Going Forward Compensation

Developing a going forward compensation program for the SpinCo is a critical process that often evolves over time. While the default approach may initially be to maintain compensation programs similar to those of the parent company, there may be a compelling case to make fundamental changes to the compensation program to address differences between the SpinCo and the Parent. However, depending on the time-frame for completion of the spin-off and the corporate governance structure, the timing of any such changes may be delayed.

Corporate governance of a spin-off can vary and we have seen each of the following approaches used:

  • SpinCo Board of Directors is led by ParentCo executives through time of spin-off until ParentCo no longer has majority stake
  • SpinCo has Independent Board members appointed prior to spin-off; decisions on compensation for SpinCo may be subject to Parent Company Compensation Committee approval
  • ParentCo Compensation Committee reviews and approves programs for SpinCo

Prior to a planned spin-off there is typically a designated subcommittee of the Parent company board that begins planning and making decisions related to the SpinCo’s compensation program. A Lead Director may be appointed to oversee this planning process on behalf of the new Board, working with the company’s HR or designated SpinCo CEO. Prior to the spin-off, coordinated efforts to recruit new directors, develop a compensation committee charter and a Board calendar, etc. are required.

In a one-stage spin-off, where all shares of the SpinCo are distributed to ParentCo shareholders at the time of the spin-off, the involvement of ParentCo executives and Board members in SpinCo corporate governance will cease at the time of the spin-off. In other cases, where the SpinCo is distributed in stages (e.g., partial IPO to public shareholders followed by a completion of the spin-off or incremental sale of shares in the SpinCo to the public), the parent company Board or parent company executives may continue to serve as Board members of the SpinCo up until the time that the parent company has fully distributed its interest in SpinCo.

When ParentCo Board members or executives are involved in the compensation design, they are more likely to fall back on maintaining a compensation approach that is consistent with that of the parent. They may continue to view the SpinCo as akin to a subsidiary. In these cases, the SpinCo’s compensation program may evolve from the timing of the initial spin-off through the year following the parent company fully divesting its interests in the SpinCo.

Pay Philosophy and Target Pay Levels

For the SpinCo, there is typically pre-planning around the desired compensation philosophy, including a defined market or peer group for pay and performance benchmarking. This peer group should be size and industry specific, reflective of the operating characteristics of SpinCo and may or may not include similar peers to ParentCo’s peers.

There is often extensive benchmarking conducted before the spin-off to determine competitive pay levels for executive positions at SpinCo, assuming new position roles/responsibilities as part of a standalone entity (vs. part of a business unit, prior to the spin-off). It is often the case that benchmarking for SpinCo as a standalone entity will support an increase in pay for executive positions. For example, the top finance executive of a subsidiary is a very different role than CFO of a stand-alone public company. Some adjustments to base salaries and bonus opportunities may be made prior to and/or near the spin date, but should be made within the context of an overall compensation framework to the extent possible. The desired pay mix needs to be determined, with the appropriate emphasis on long-term (equity) incentives to ensure equity ownership build up and alignment with shareholders.

Annual Incentive Program

As with any company, the ongoing bonus program is designed so that funding is based on an appropriate mix of corporate, business unit and/or individual performance. The mix depends on the company’s emphasis on line of sight unit results or overall corporate team results. Performance metrics, whether top line, bottom line, or return based, should appropriately support the company’s strategy. Some investors may initially focus on EBIT/EBITDA or cash flow, yet ultimately determine that a balanced mix of metrics is desirable.

It is worth noting that for both short and long-term incentives, based on the tax code rules (IRC Sec. 162(m), the “performance based compensation” tax exemption for select executive officers), if a company gets an annual and long-term incentive plan approved prior to the Spin by the ParentCo board, and discloses such plan documents in any S1 filing, the company is exempt from IRC Section 162(m) rules for one year. Reapproval of such plan(s) by SpinCo shareholders is required prior to Sec. 162(m) transition relief expiring, and is also required under applicable stock exchange rules. Most companies, however, will still construct their plans to conform with “performance based compensation” rules and best in class industry/market practices.

Long-term Incentives

Key objectives of the Long-term Incentive (“LTI”) program for the SpinCo are to build executive/ employee stock ownership and to create excitement, engagement and alignment with shareholder value creation.

An important first step is to determine an overall equity pool to reserve for equity grants at the SpinCo, i.e., the amount of public stock outstanding that will be shared with employees as part of the compensation program. (This amount is generally under 10% of CSO, once initial IPO, has occurred and/or upon completion of the full spin; industry norms should dictate). At the initial IPO, or at full spin-off, it is common to grant a front loaded equity award to ‘jump start’ employee ownership in the new company. Some companies make a broad-based award to employees deeper in the organization, or beyond the executive group. Stock options and restricted stock are used for this type of grant, yet use of options (vs. full value awards) should be balanced with participation, share usage and cost considerations.

The core LTI framework for SpinCo should be designed to accomplish multiple objectives. Emphasis on equity programs helps to build shareholder alignment. Stock-based performance programs are strongly recommended. Not only do they reflect prevalent practice, but they are viewed favorably by large shareholders. Performance-based equity will also serve as a tool for the new leadership team to promote a focus on specific longer term performance results.

Like any LTI program, balance is important. While some specific industries may use more restricted stock than others (e.g., energy companies), most restricted stock is granted at lower levels in the organization, or for special retention/recognition grants. As a new entity, any new design presents an opportunity to assess long term performance goals related to business strategy and those being communicated to the marketplace. Such goals should likely be incorporated into the LTI program.

Vesting, form of payout and termination provisions are also important. The spin-off event is an opportunity for the new company to re-evaluate ParentCo practices. For example, SpinCo may choose to implement somewhat more stringent award termination provisions to support longer term employment of employees. To further align with best practice, companies should include CIC provisions that provide for outstanding award vesting only upon both completion of a CIC and termination of employment for good reason (i.e., a “double trigger”).

Severance provisions should be established as part of a formal severance (CIC/non-CIC) program or through severance agreements, or less common, as part of an employment agreement. These programs should be implemented after careful consideration of potential costs and benefits to the participant and to the company. Recognize that severance benefits are a sensitive issue for many investors. Tax gross-ups for any 280(g) CIC tax liabilities are no longer common and should not be included. Non-compete and non-solicitation provisions should be put in place for the new entity, as standalone policies or as part of LTI award agreements.

Governance Practices

Certain good governance practices that are commonly in place should be implemented, as they are in the best interests of SpinCo and shareholders and have come to be expected.

Stock Ownership guidelines are now very mainstream and expected by shareholders. They should apply to the newly formed executive group. In SpinCo, it may take some time to ramp up ownership in SpinCo stock, particularly if outstanding ParentCo equity awards were converted at spin using the shareholder approach. Keep in mind there should be a phase-in period before executives are held accountable and a ‘soft’ penalty my make sense, to help facilitate ownership, such as a required holding of 50% of net shares (vested or settled), until the guideline is met.

A Clawback Policy for any awards that were based on results impacted by an accounting restatement is a matter of good governance. A majority of companies today have one, with the ability for discretionary recoupment in the case of fraud or earnings restatement. Note that potential Dodd-Frank rules may mandate a “no fault” policy if finalized.

An Anti-Hedging Policy should be in place that prohibits executives from entering into any hedging transactions related to the company’s stock or trading any instrument related to the future price of the stock.

If Dodd-Frank rules are finalized as currently expected, companies may need to modify these provisions to comply with final rules, but on their own merit, these provisions should be put in place as a baseline.

Directors Compensation. The outside directors’ compensation program of SpinCo should ultimately reflect appropriate market norms for companies of similar size and industry, in terms of the amount of pay provided, the cash/equity mix, and overall structure of board and committee service pay. The design should consider the duties required of directors, as well as the company’s executive compensation philosophy. Initially however, the structure of SpinCo’s program will often resemble the ParentCo program.

The directors equity plan, if separate, follows the same rules as executive equity plans. The ParentCo board typically approves the SpinCo plan prior to the spin-off. Shareholders of SpinCo must reapprove the plan prior to IRC Sec. 162(m) transition relief running out, and also to comply with stock exchange listing requirements.

If any directors work on SpinCo activities prior to the spin-off, special equity compensation may be awarded, or pro-rated. If board leadership includes a non-executive chair or lead director, compensation will need to reflect the expected role, responsibilities and time commitment expected at that time.

4. Modification to ParentCo Compensation Programs Post-Spin

After the spin transaction, it is a good time for the remaining ParentCo to review its own compensation programs to ensure that they reflect the company’s new size and business focus. While not inclusive, the following program components may require review and/or potential modification:

Compensation Philosophy and Competitive Market. The company should assess who the appropriate peer companies are in terms of size, business mix, customers, geographic footprint, domestic vs international business, etc. It may be that the company maintains a market median pay philosophy, but that market position means something different now. If the company’s size is significantly smaller than before, pay levels will need to be monitored for alignment with the newly defined market over time.

Annual Incentive Program. The company’s annual incentive plan, in particular, may need revision so that the performance metrics reflect key drivers of the remaining entity and adjustments to the plan should reflect the new adjustments to the plan should reflect the new organization structure as it relates to any Business Unit or Division performance components. If the remaining business has slower growth prospects and lower margins, for example, the performance metrics may need to be redefined and the weightings reallocated. It may also be the case that there is more of a role for strategic goals as ParentCo also embarks on a new business strategy.

Long-term Incentive Plans. The company should reassess the role of various LTI vehicles at ParentCo. For example, in a low growth business, stock options are not the most effective long term incentive and the company may be better served by increasing the role of a three year LTIP. Conversely, the company may want to instill renewed enthusiasm around the ParentCo’s long term stock performance and growth potential. It may be an appropriate time to emphasize the role of equity. It is also a good time to reassess equity award participation as it relates to overall cost and/or share utilization, both domestically and internationally.

From a more technical standpoint, the Parent should review its current equity plans and share reserve, in light of the recapitalization. A spin-off event itself may not necessarily require revisions to plan documents, but it is an appropriate time to review documents to ensure that appropriate terms and provisions are included. It is also a good time to review compliance with IRC Section 162(m) and 409A.

The compensation related programs and provisions that need to be addressed and acted upon in a spin-off are comprehensive. It is important to the ongoing entities that both ParentCo and SpinCo business objectives are supported by appropriate pay design. At the same time, employee perspectives need to be considered as these transactions can present uncertainty. Planning should begin well in advance of any potential or planned transaction. A cross-functional team from HR, legal, finance and possibly outside advisors, should oversee the necessary action steps. This report can be used to help guide the process and compensation decisions that an organization will need to consider in a spin-off.

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