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.
Data effective: March 16, 2020
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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/.
The CAP 120 Company Research consists of companies from ten industries, selected to provide a broad representation of market practice among large U.S. public companies. In this report, CAP reviewed Pay Strategies, Annual Incentives, Long-Term Incentives, Perquisites, and Stock Ownership Guideline Requirement Provisions of these companies in order to gauge general market practices and trends.
Characteristics of the CAP 120 Company Research Sample
The CAP 120 Research Study consists of companies selected from ten industries intended to provide a broad representation of market practice among large U.S. public companies. The fiscal year revenues of the companies in our sample range from approximately $3 billion to $500 billion (median revenue of $32.7B) and are summarized in the following exhibits.
|Financial Summary ($M)||Cumulative Total Shareholder Return Ending on 12/31/2018|
|Percentile||Revenue||Net Income||Assets||Market Cap||1-Year||3-Year||5-Year|
Among companies in CAP’s 120 Research, 97% disclose using a peer group for pay benchmarking purposes. The median number of companies in a peer group is 18.
Consistent with last year, approximately one-third (31%) of the companies with a peer group use more than one peer group. Companies with multiple peer groups either use two peer groups for pay benchmarking (e.g., an industry specific peer group and a general industry peer group) or use one peer group for pay benchmarking and another peer group for relative performance comparisons.
|Peer Group (n = 116)|
|% of companies with a disclosed peer group||% of companies with more than one peer group (among companies with a peer group)||Median # of companies in peer group|
While use of a peer group is almost universal among large cap companies, many use a peer group as a reference point when setting pay and do not disclose targeting a specific pay position relative to market. Only half of the companies in our study disclose a target pay philosophy for total compensation. Of these companies, only 7% target total compensation above median.
|Target Pay Philosophy (n = 56)|
|Element||Base||Bonus||Cash||Long-Term Incentives||Total Compensation|
|% Target Below Median Pay||8%||–||–||–||–|
|% Target Median Pay||87%||96%||96%||97%||93%|
|% Target Above Median Pay||5%||4%||4%||3%||7%|
Annual Incentive Plan Metrics
A majority of CAP 120 companies (90%) fund their annual incentive plans using two or more metrics. Only 10% of companies use 1 metric, reflecting a decrease from 2009, as companies try to balance overall plan funding. Use of multiple performance metrics allows for annual incentive payouts to be reflective of broader company performance.
Operating Income (including EBIT, Pre-tax Income and EBITDA), Revenue, EPS, and Cash Flow are the most common metrics used in annual incentive plans. Since our first study, the use of Operating Income and Revenue has been generally consistent. Over this period, the use of EPS, Return Metrics and Net Income has decreased (by 11, 10 and 6 percentage points, respectively).
Note: In the chart above, n/a = not available. Percentages add to greater than 100% due to multiple responses disclosed by many of the companies. Return measures category is comprised of the following metrics: ROE, ROI, ROIC, and ROA.
More companies are incorporating non-financial measures in the annual incentive plan as they are unique to a company’s strategy. Overall, approximately 40% of companies in our study use strategic and other non-financial measures, with certain industries (e.g., Health Care and Oil and Gas) having more of an emphasis on these measures. An emerging trend is to incorporate ESG (environmental, social and governance) metrics in the annual incentive program. Overall, 14 companies (12%) in our study disclosed such measures; environmental measures are most prevalent (8 companies) followed by diversity and inclusion (6 companies).
The chart below shows the three most common metrics by industry in 2018:
|Metric #1||Metric #2||Metric #3|
|Automotive (n=11)||Cash Flow (73%)||Op. income / EBIT / EBITDA (64%)||Revenue (36%)|
|Consumer Goods (n=14)||Revenue (71%)||EPS (57%)||Op. income / EBIT (50%)|
|Financial Services (n=7)||EPS (68%)||Return Metrics (43%)||Strategic Goals (43%)|
|Health Care (n=11)||Strategic Goals (64%)||Op. income / Pre-tax Income (55%)||EPS (45%)|
|Insurance (n=12)||Op. Income (58%)||Op. EPS (33%)||Op. ROE (25%)|
|Manufacturing (n=10)||Cash Flow (60%)||EPS (50%)||Op. Income (20%)|
|Oil and Gas (n=11)||Strategic Goals (64%)||Op. Income / EBITDA (55%)||ROIC (36%)|
|Pharmaceuticals (n=11)||Revenue (73%)||Pipeline / R&D (73%)||EPS (64%)|
|Retail (n=11)||Revenue (82%)||Op. Income / EBIT / Pre-tax Income (82%)||Strategic Goals (27%)|
|Technology (n=12)||Revenue (67%)||Cash Flow (50%)||Op. income / Pre-tax Income (50%)|
Note: Percentages reflect the prevalence of companies disclosing the metric.
CAP reviewed proxy disclosures to understand how companies establish annual incentive payout ranges (i.e., threshold payout and maximum payout expressed as a percentage of the target award). 45% of companies in our study disclose a threshold annual incentive payout at a defined level other than zero. The most common threshold payout for these companies is 50% of target. Other companies start at a 0% payout for threshold performance with payout levels progressing to target.
A majority of companies (84%) disclose a maximum annual incentive opportunity. Most of these companies (74%) have a maximum bonus opportunity of 200% of the target award; only a handful of companies (7) have a maximum payout above 200% of target. We continue to see a decline in the number of companies with a maximum payout above 200% of target (8 companies in 2017 and 11 companies in 2016).
Long-Term Incentive Vehicle Prevalence
A vast majority of companies in our study (84%) use multiple long-term incentive vehicles for the most senior executives. Slightly more than half of the companies (55%) use two long-term incentive vehicles, typically delivered through either a long-term performance plan and time-based restricted stock/units (an uptick this year to 58%) or a long-term performance plan and stock options.
The next most common approach is to use three vehicles (29% of companies). A small percentage of companies in our study (16%) use only one vehicle and it is most typically delivered in the form of a long-term performance plan (84%).
Performance-based LTI awards for senior executives is used nearly universally among large cap companies (95%) and the use of stock options has declined to 51% of companies. This contrasts our first study when the use of stock options and performance-based LTI was fairly balanced (79% used performance-based LTI and 73% used stock options). The prevalence of time-based restricted stock/units has remained flat.
LTI Award Mix
Performance-based LTI reflects the largest portion of the LTI mix for the CEO. For the first time in our large cap company study, time-based restricted stock reflects a larger portion of the total LTI mix than stock options. The decrease in the value delivered in stock options has shifted to performance-based LTI in the overall LTI mix. The value delivered in time-based restricted stock/units has been generally flat since 2011.
Restricted Stock / Units (RS/RSU) and Stock Option Provisions
The majority of companies use ratable vesting over a period of three years for time-based RS/RSU awards. Approximately 30% of companies use a vesting schedule of four years or more.
For stock options, most companies use 3-year ratable vesting with a 10-year term.
|Vesting Approach||Vesting (Years)||Term (Years)|
|Ratable||Perf-Based||Cliff||3||4||> 4||10||< 10|
Performance-Based Award Provisions
The payout curve for performance-based LTI awards with upside and downside leverage mirrors the payout curve for annual incentive awards; the most common threshold payout is 50% of target and the most common maximum payout is 200% of target. Unlike annual incentive awards, a large number of companies (41% for long-term plans vs. 26% for annual incentive plans) disclose a threshold payout between 25% – 50% of the target award.
Total Shareholder Return (TSR) continues to be the most prevalent performance metric in long-term performance plans; 63% of companies use it as a measure in the performance-based LTI plan. Return metrics are the second most common measure (51% of companies) followed by EPS (31%) and Revenue (23%).
In CAP’s first study, EPS was the most common measure followed by TSR. The rise in the use of TSR can be linked to the influence of proxy advisors who have increasingly used TSR as a proxy for performance since our first study (conducted prior to the adoption of the Dodd-Frank Wall Street Reform and Consumer Protection Act which mandated the shareholder Say on Pay vote). Of the companies that use TSR, approximately 30% disclose using it as an award modifier instead of a weighted metric.
The decline in the use of EPS in performance-based LTI plans is consistent with the decline of EPS use in annual incentive plans. Interestingly, the use of return measures has increased significantly from our first study (51% in 2018 vs. 20% in 2009) as companies are aligning executive long-term pay with profitable growth and operational efficiency. Return metrics are also often favored by institutional shareholders.
Note: Percentages add to greater than 100% due to multiple responses disclosed by many of the companies. Return measures category is comprised of the following metrics: ROE, ROI, ROIC, and ROA.
Performance Measurement – Absolute vs. Relative
A majority of companies in our study balance absolute financial performance goals (based on budget) with relative metrics. This balanced approach has increased substantially since our first study. Today, 52% of companies use both absolute and relative metrics vs. 25% of companies in 2009. This increase is tied to the increase use of relative TSR as a long-term metric.
In our most recent study, only 11% of companies use relative performance metrics only (down from 26% in 2009) and 37% of companies use absolute metrics only (down from 49% in 2009).
A majority of companies in our study (87%) provide perquisites to their CEO. Most companies (69%) also provide perquisites to the CFO. These findings are consistent with our study last year.
Personal use of aircraft, personal security, financial planning and automobile allowance continue to be the most common CEO perquisites. Even though the percentage of companies providing perquisites to the CEO has been relatively flat, the percentage of companies providing the most common perks has increased suggesting that when companies are providing perks to their CEO, it is likely a combination of the four most common categories.
The median value of perquisites delivered to the CEO in 2018 ($125,000) is lower than the value five years ago ($143,000). There was nearly a 30% increase however, in the median perquisite value for the CFO in 2018 ($32,000) compared with 2014 ($25,000).
Stock Ownership Requirement Provisions
Stock ownership guidelines are very common in publicly traded companies and are viewed favorably from a governance perspective. 95% of companies in our sample have requirements in place for the NEOs. For the CEO, the median guideline (expressed as a multiple of base salary) is 6x and for other NEOs it is 3x.
|Median Multiple of Base Salary|
Many companies (52%) have a stock holding requirement in place in addition to the stock ownership guideline requirement for senior executives. It continues to be less common for companies to have stock holding policies that are independent of stock ownership guidelines, or that apply after the ownership requirement has been achieved. These holding policies require executives to hold net shares received from equity awards for periods ranging from one year (most common) to post-retirement. These are generally viewed as shareholder friendly, yet their prevalence has remained fairly consistent over the past few years.
|Holding Requirement Until SOG is Met||Holding Requirement Separate from or After SOG is Met||Holding Period for Separate/Post-SOG Requirements (n=26)|
|1 Year||5 Years||Until Retirement||Post Retirement|
For questions or more information, please contact:
Melissa Burek Partner
Lauren Peek Principal
Each year CAP analyzes non-employee director compensation programs among the 100 largest companies. These companies can provide early insights into trends for compensation practices. This report reflects a summary of pay levels and pay practice trends based on 2019 proxy disclosure.
pay levels remained generally flat
- Total Fees. Board compensation continues to be in a steady state with low single-digit annual increases. Median is now $305K, up from $300K last year. This is the lowest year over year increase we have seen recently.
- Pay Structure. Companies rely mainly on annual retainers (cash and equity) to compensate directors. Pay programs for large companies are simple and tend to rely less on meeting fees or committee member retainers. We support this approach as it simplifies administration and eliminates the need to define what counts as a meeting, though this simplified approach may not be appropriate in all situations.
- Meeting Fees. Consistent with prior years, only 12 percent of companies studied provide meeting fees. Companies could consider having a mechanism for paying meeting fees if the number of meetings in a single year far exceeds the norm (“hybrid approach”). Also consistent with prior years, 5 percent of companies studied used this “hybrid approach” to meeting fees, with the threshold number of meetings ranging between 6 and 10.
- Equity. 98 percent of companies used full-value awards (shares/units) and only 4 percent used stock options (3 of the 4 companies granting stock options used both vehicles). Almost all companies denominated equity awards using a fixed value, versus a fixed number of shares. Using fixed value is generally considered best practice as it manages the “target” value awarded each year.
- Pay Mix. On average, total pay is comprised of 62 percent equity and 38 percent cash, which is consistent with findings in other recent years.
- Process. One-third of companies disclosed increases to board cash and/or equity retainers versus prior year.
Committee Member Compensation.
prevalence continues to slowly decline
- Overall Prevalence. 45 percent of companies paid committee-specific member fees for Audit Committee service, 28 percent paid member fees for Compensation Committee service, and 26 percent paid member fees for Nominating/Governance Committee service. Companies rely more on board-level compensation to recognize committee member (non-Chair) service, with the general expectation that all independent directors contribute to committee service needs.
- Total Fees. Of the companies that paid committee member compensation, the median was $13K in total, down from $16k in prior year.
Committee Chair Compensation.
- Overall Prevalence. More than 90 percent of companies studied provided additional compensation to committee Chairs to recognize additional time requirements, responsibilities, and reputational risk.
- Fees. Median additional compensation remained at $25K for Audit Committee Chairs, $20K for Compensation Committee Chairs, and increased to $20K for Nominating/Governance Committee Chairs. In the past, Nominating/Governance Chairs were paid around $15K. Most often, such fees were delivered through an additional cash retainer.
Independent Board Leader Compensation.
- Non-Exec Chair. Additional compensation is provided by nearly all companies with this role. Median additional compensation was $225K. As a multiple of total Board Compensation, total Board Chair pay was 1.75x a standard Board member, at median.
- Lead Director. Median additional compensation was $35K, consistent with prior year. Additional compensation is provided by nearly all companies with this role. The differential in pay versus non-executive Chairs is in line with typical differences in responsibilities.
prevalence continues to increase
- 62 percent of companies have an award limit for director compensation, up from 54 percent in the prior year.
- Director pay limits are largely due to advancement of litigation where the issue has been that directors approve their own annual compensation and are therefore deemed to be inherently conflicted.
- Similar to last year, limits range from $250K to $4.75 million, with a median limit of $750K. Companies that denominate the limit in shares tend to have a higher dollar-equivalent limit, with a median of $925K. The median for the companies with value-based limits is $675K.
Limit Range Prevalence <= $500,000 29% $500,001 – $1,000,000 50% $1,000,001 – $2,000,000 16% > $2,000,000 5%
- The limits are generally much higher than annual equity grants. Approximately one-third of limits are equivalent to more than 5x the annual equity grants.
Limit Multiple Range Prevalence <= 3x annual equity 37% 3.01x – 5x annual equity 31% 5.01x – 7x annual equity 17% > 7x annual equity 15%
- Approximately 60 percent of companies with limits apply it to just equity-based compensation, compared to 70 percent last year. We anticipate the prevalence of limits that apply to both cash and equity-based compensation (i.e., total pay) will continue to increase.
- Some companies exclude initial at-election equity awards and/or additional pay for Board leadership roles from the limit.
- The higher limits above likely are intended to address the possibility of having a non-executive Chair. However, in terms of potential perceived conflict of interest when it comes to setting pay for the non-executive Chair, the incumbent can be recused from discussions and the vote on their pay.
Some Changes CAP Suggests Companies Consider (Looking Ahead).
- Recruiting New Directors. As boards look to refresh and diversify their membership, this may be the time to re-visit initial at-election equity awards for new directors. There has been a considerable “move to the middle” with director pay programs, and at-elections grants can be a way to differentiate your company’s pay program in the recruiting process without a broader, more costly, increase to standard director pay levels.
- Board Leadership Roles. Taking on the role of non-executive Chair, Lead Director or Chair of a major Board committee can come with considerable additional time requirements, responsibilities, and reputational risk, yet additional compensation provided for most of these roles only reflects a market premium on the standard director pay program. Providing greater additional compensation for the role of non-executive Chair, Lead Director of Chair of a major Board committee should be considered, in recognition of the typical time requirements, responsibilities and reputational risk individuals in these roles take on.
- Stock Ownership Requirements. Many boards, especially among the largest companies, require equity-based compensation be deferred until retirement (i.e., termination of board service). While we encourage further aligning director and shareholder interests through equity ownership, another approach is maintaining a standard stock ownership guideline (e.g., multiple of annual cash retainer). A stock ownership guideline may be a competitive advantage when recruiting new directors who may be more focused on current compensation, versus having to hold all equity-based compensation until termination of board service.
Total Board Compensation ($000s)
Additional Compensation for Independent Board Leaders ($000s)
1 Audit, Compensation and/or Nominating and Governance committees.
2 Audit, Compensation and/or Nominating and Governance committees.
3 Excludes controlled companies. Also excludes instances where Lead Director role is assumed by Chair of Nominating and Governance Committee, who receives compensation for the role.
4 Total Board Compensation reflects all cash and equity compensation for Board and committee service, excluding compensation for leadership roles such as committee Chair, Lead/Presiding Director, or non-executive Board Chair.