The Conference Board, Arthur J. Gallagher & Co. and MyLogIQ Release Comprehensive Review of Russell 3000 Executive Pay Packages

According to research on executive compensation released today by The Conference Board, while the value of cash bonuses awarded by publicly traded U.S. financial firms grew 10.6 percent overall in 2016, the analysis by asset value shows extraordinarily wide variation in the level of such growth. CEOs of leading companies with asset value in the US$50-99.9 billion group reported staggering year-on-year bonus increases of more than 40 percent in value (and almost 500 percent since 2010). However, even during the 2016 expansionary period, annual bonuses were affected by the cyclical fortunes of underperforming industries, with companies in consumer discretionary, consumer staples, health care and telecommunications services reporting median declines.

A collaboration between The Conference Board, Arthur J. Gallagher & Co. and MyLogIQ, CEO and Executive Compensation Practices: 2017 Edition documents trends and developments in CEO and senior management compensation at companies that issue equity securities registered with the U.S. Securities and Exchange Commission (SEC), and were included in the Russell 3000 index as of May 2017. The study of disclosed compensation elements is complemented by the review of the major features of short-term and long-term incentive plans (STIs and LTIs) in a subset of 100 mid-market companies included in the Russell 3000 index as of May 2017. (For the purpose of this report, mid-market refers to nonfinancial companies with annual revenue between US$1 billion and US$5 billion, and financial companies with asset value between US$1 billion and US$10 billion). In addition, the publication illustrates findings from The Conference Board survey of corporate secretaries and general counsels on the role of the board of directors in setting executive compensation, as well as the analysis of say-on-pay resolutions and shareholder proposals at Russell 3000 companies on issues of executive pay that went to a vote in the 2017 proxy season.

“We are pleased to present the new edition of what has become one of the most comprehensive benchmarking publications on the executive compensation of U.S. public companies,” said Matteo Tonello, Managing Director of Corporate Leadership at The Conference Board and a co-author. “Given today’s emphasis on pay for performance and the dialogue on equality that is expected to continue in coming years, our granular data on CEO pay across the entire Russell 3000 is a window into long-term business strategy and the changing corporate culture.”

“Using the data contained in this report as both a benchmark and trend indicator empowers employers, their compensation committees and boards to design strategic executive compensation programs to meet the needs of today’s key talent,” added co-author James Reda, Managing Director, Executive Compensation in the Human Resources & Compensation Consulting practice of Arthur J. Gallagher & Co. “Balancing the pay mix to incentivize performance, retain top performers and drive shareholder value is a complex task. This report is a valuable tool to help drive employers’ strategic decision making.”

“Our broader sample highlights the bigger picture,” said Paul Hodgson, partner of governance research firm BHJ Partners and co-author of the study. “Rather than limiting our analysis to the S&P 500 or another sample of large public corporations, our report highlights the important differences that exist in executive compensation between the S&P 500 and the broader Russell 3000 universe, making it that much more relevant and applicable to thousands of employers.”

Other findings highlighted in CEO and Executive Compensation Practices: 2017 Edition include:

• Exceptional financial market performance continued to fuel the recourse to equity-based compensation, with the pay mix analysis confirming the inexorable rise of stock awards at the expense of both base salary and stock options. Compensation committees of boards of directors have continued to take advantage of high equity valuations to increase the amount of pay at risk, and shift the weighting of compensation elements from cash to stock. From 2010 to 2016, stock awards are up from 22.8 percent to 36.7 percent in the Russell 3000 and from 32 percent to 47.4 percent in the S&P 500, occupying a greater portion of total pay than ever before. Only seven years ago, base salary represented 30.25 percent of the typical Russell 3000 CEO pay mix, a share that fell consistently over time to reach 23.93 percent in 2016; in the S&P 500, it went from 14.22 percent in 2010 to 11.3 percent last year. In general, as widely documented since the financial crisis of 2008, the weight of stock options in the typical compensation package has been gradually reduced, mostly due to their volatility and concerns about their real effectiveness as performance motivators.
• In addition to expanding their share of the total compensation mix, stock awards have been growing in value and offsetting the softening of stock option grants. In 2016, the median Russell 3000 CEO received US$1.4 million worth of company shares, while their counterpart in the S&P 500 received US$5.4 million—marking a growth rate of 12.4 percent in the Russell 3000 and almost 8 percent in the S&P 500. Even more remarkable is the trajectory that this component of pay has followed over the last few years: In the 2010-2016 period alone, the value of stock awarded to CEOs has risen 265 percent in the Russell 3000 and almost 100 percent in the S&P 500. Energy companies were the most generous in terms of stock grants in 2016, awarding US$3 million at the median, while health care companies reported the lowest amounts (US$402,000). Over the six-year period, the highest median increase in stock award value was tenfold and seen among consumer staples organizations. The analysis by company size reveals a direct correlation between the value of stock grants to CEOs and the size of their employer.
• Increases in CEO base salary vary considerably by index, with the median rise in the Russell 3000 close to that for total compensation and little or no movement in the S&P 500.Low inflation rates and the shift to compensation in the form of equity awards continue to explain the moderate rise in base salary. In 2016, the median base salary rise for CEOs in the Russell 3000 was 4.6 percent, compared to less than a percentage point in the S&P 500. By means of comparison, for 2016 The Conference Board has recently reported an overall base salary increase for the general workforce of U.S. public companies of 3 percent, the same as in each of the last seven years.[1] A more detailed breakdown by revenue and asset value confirms that rises in base salary for CEOs of the largest companies lagged those of the smallest by significant amounts. Only those CEOs leading the very largest companies, US$50 billion and more in revenue, received an increase of more than 5 percent. Most others were in the region of 2 percent or less.
• While increases in base salary for Named Executive Officers were similar to those for total compensation, NEOs benefited from much higher bonuses, especially in the S&P 500.The rates of increase in NEO base salary closely mirrored those seen for their total compensation—more specifically, they were 5.1 percent in the Russell 3000 and 3.2 percent in the S&P 500. No significant variation in base salary emerges from the analysis by industry, either over the last year or over the last six years, except for health care companies that reported the highest of all median annual salary raises (8.6 percent). In the analysis by size, changes in base salary also followed a pattern that is very similar to the one described for total compensation. The rate of change for annual bonuses, on the other hand, was higher than that for total compensation, which would lead to an increase in cash incentives in the overall mix. The pattern by company size was also reversed, as bonuses increased by more for NEOs in the S&P 500 (9.3 percent) compared to those in the Russell 3000 (7.7 percent). The overall value of annual bonuses has changed very little over the last six years, especially in the S&P 500, where it has hovered around US$600,000 for the whole period. For both groups, there was a drop in bonus value in 2015, leading to the more substantial increase to 2016 as bonuses recovered.
• Performance-based awards now approach 50 percent of the total LTI award value at mid-market companies, demonstrating that these companies adopt the LTI trends of the country’s largest companies, but with some lag time. Among the Top 200 U.S. companies by market capitalization, performance-based LTI awards first averaged 50 percent of LTI grant value back in 2012, reflecting at that time a greater desire among large companies for pay-for-performance alignment and rewards with a big potential upside still within the limit of Internal Revenue Code Section 162(m) tax-deductibility. That said, the mid-market is catching up, with performance-based awards making up 48 percent of the total LTI grant value in 2016, up from just 39 percent in 2014. Following the trend of large companies, as performance-based awards have increased in the mid-market, both appreciation awards and time-based restricted stock/units have declined (from 26 percent and 35 percent in 2014 to 20 percent and 32 percent in 2016, respectively). With respect to the choice of compensation vehicles, in designing LTI awards with two or more performance metrics, a number of companies tend to prefer a balanced approach that incentivizes stock appreciation, corporate results and retention. In 2016, 29 percent of companies used all three types of LTI awards: 1) appreciation awards that include stock options, SARs (stock appreciation rights) and incentivized stock price increases); 2) performance-based awards that include performance shares, performance restricted stock, and performance or premium stock options; and 3) long-term incentive cash—effective vehicles to promote corporate performance targets and restricted stock to ensure executive retention. Use of all three LTI award vehicles has nearly doubled since 2014, when only 16 percent of companies structured plans this way.

CEO and Executive Compensation Practices: 2017 Edition is available for download here.

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