US boards ignore long term and reward CEOs for status quo
Well, what a difference a few months and a larger pool of CEOs make. According to an updated analysis, the top 200 chief executives at public companies with at least $1 billion in revenue got a big rise last year. The median 2012 pay package came in at $US15.1 million - up 16 per cent from 2011.
So much for the idea that shareholders were finally getting through to corporate boards on the topic of reining-in pay.
As usual, cash pay pales for many next to the value of the shares and option grants they received. Median cash compensation was $US5.3 million last year, while share and option grants came in at $US9 million.
Share grants are clearly where the action is, and their value can really add up. The median value of shareholdings of these top CEOs is calculated at $US51 million.
The trouble is, share grants, which are supposed to create an incentive to improve performance, are also where pay excesses and disconnects arise, compensation consultants say. How these boards measure corporate performance can fail to align long-term incentives with shareholders' interests.
Boards typically assess an enterprise's performance not only internally against what occurred in previous years but also externally, against a peer group of companies.
Far too often, though, measures to evaluate performance are focused on short-term results and miss a crucial element that determines long-term success: the ability to innovate.
"We need compensation that is aligned to long-term value drivers, like innovation," said Mark Van Clieaf of MVC Associates International. "Yet at probably 70 to 80 per cent of companies, there are no metrics for measuring the impact of new products or services that were launched."
Companies that don't weigh innovation in deciding pay are essentially rewarding the status quo and failing to reward moves to keep a company strong in the long term, with investment in research.
James Reda, an independent compensation consultant, suggests that boards allocate awards at or near the end of the year so that total shareholder returns can be assessed more easily.
"Why just give stock away to senior executives and hope for future performance?" he said. "It's better to adjust the pay based on performance the CEOs are actually delivering to shareholders. This is also a good way to put the brakes on CEO pay."
"How much of the pay is driven by right time, right place, and how much is driven by truly sustained, multiyear performance that's still in place X years out?" says pay consultant Brian Foley.
"What I would like to see is not just performance criteria that are robust and meaningful, but also awards that are at risk for a meaningful period of time."
Frequently Asked Questions about this Article…
According to the article's analysis, the median overall compensation for the top 100 American CEOs was about US$14 million (a 2.8% increase from 2011). Expanding the sample to the top 200 public-company CEOs with at least US$1 billion in revenue raised the 2012 median to US$15.1 million — a 16% increase over 2011.
The article notes that median cash compensation for these top CEOs was about US$5.3 million in 2012, while the median value of share and option grants was roughly US$9 million — showing equity grants make up a large portion of executive pay.
Share grants are meant to align executives with shareholders, but compensation consultants say problems arise when boards use performance measures that emphasize short-term results or peer comparisons rather than long-term value drivers. That can reward the status quo and create pay that doesn't reflect sustainable shareholder value.
Boards commonly evaluate performance internally (versus prior years) and externally (against a peer group). The article says these measures are often short-term focused and miss key long-term factors — especially innovation — so they may not align incentives with long-term shareholder interests.
Measuring innovation is important because it drives long-term value, yet the article cites Mark Van Clieaf saying that at probably 70–80% of companies there are no metrics to measure the impact of new products or services when deciding pay.
The article highlights two expert suggestions: James Reda recommends allocating awards at or near year-end so total shareholder returns (TSR) can be assessed before finalizing pay, and Brian Foley urges robust, meaningful performance criteria with awards kept at risk for a meaningful multi‑year period.
The median value of shareholdings for the top CEOs in the article's sample was calculated at about US$51 million, indicating many executives hold substantial equity stakes.
Timing matters because granting stock early and hoping for future performance can reduce accountability. The article reports James Reda's view that awarding equity at or near year‑end — after assessing total shareholder returns — makes it easier to adjust pay to actual performance and can help rein in excessive CEO pay.
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