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."
New York Times
Frequently Asked Questions about this Article…
The article said CEO pay rose noticeably in 2012: an earlier look at the top 100 US CEOs showed a median overall compensation of US$14 million (a 2.8% increase over 2011), while an updated analysis of the top 200 CEOs at companies with at least US$1 billion in revenue found a median 2012 pay package of US$15.1 million — up 16% from 2011.
According to the article, median cash compensation for top CEOs was about US$5.3 million in 2012, while share and option grants accounted for a larger portion at roughly US$9 million. The median value of these CEOs' shareholdings was estimated at about US$51 million.
The article explains that share grants are meant to align executives with shareholders, but they can create pay excesses and disconnects. Boards often base awards on short-term or peer-group measures that miss crucial long-term value drivers (like innovation), so stock grants can end up rewarding the status quo instead of sustained, value-creating performance.
Boards usually assess performance by looking at a company's internal year-to-year results and by comparing results to a peer group of companies. The article notes this approach often focuses on short-term outcomes and can overlook measures that predict long-term success, such as innovation or multiyear performance durability.
Compensation consultants in the article argue that pay should be tied to long-term value drivers like innovation. Yet they found that roughly 70–80% of companies lack metrics to measure the impact of new products or services, meaning boards may not reward leaders for strategic, research-driven moves that sustain long-term growth.
The article cites recommendations such as tying compensation to meaningful long-term metrics (including innovation), making awards 'at risk' over a meaningful period, allocating awards near year-end so total shareholder returns can be assessed, and adjusting pay based on the actual performance delivered to shareholders rather than simply granting stock up front.
No — the article suggests that despite hopes shareholders were influencing boards to rein in pay, the updated data showed a significant increase in median pay. It implies that shareholder pressure has not consistently translated into lower or better-aligned executive compensation in 2012.
Investors should check whether pay plans include long-term performance metrics (not just short-term or peer comparisons), if awards are at risk for multiple years, how much pay is equity versus cash, and whether the company measures outcomes like innovation or total shareholder return when awarding stock. These disclosures help indicate whether incentives are likely aligned with long-term shareholder value.
Call 1300 880 160
Start a chat
Schedule a call
