Pension Value Changes Offset CEO Compensation Increases in 2013

April 23, 2014 — Total compensation disclosed in company proxy statements for CEOs at the nation's largest corporations remained relatively unchanged in 2013, primarily the result of sharply lower pension values, according to an analysis of proxies by Towers Watson.

The Towers Watson analysis found that total pay for S&P 1500 CEOs increased less than 1% (0.5%) in 2013, down from the 5.7% median increase CEOs received in 2012. Total pay, as reported in the Summary Compensation Table (SCT) in company proxy statements, includes base salary, actual annual and long-term cash bonuses, grant-date value of long-term incentives, such as stock options, restricted stock and long-term performance shares, the value of perquisites, earnings from deferred compensation and the change in the value of pension benefits. The limited size of total pay increases can be attributed to much lower values for executive pensions, driven down by higher interest rates. If the impact of the change in pension values were excluded from the analysis, total SCT pay would have increased 4.3% in 2013.

The analysis also showed that realizable pay, which takes into consideration the current value of a CEO's outstanding stock-based awards, increased nearly 15% last year, reflecting strong stock market performance. Therefore, while total reported pay remained flat last year, realizable pay increased by double digits, but was still outpaced by shareholder returns for the same group of companies. The analysis, based on 430 S&P 1500 companies that filed proxies disclosing 2013 pay by late March, noted that CEO salaries increased 2.7% in 2013, roughly the same as in 2012, while target annual bonuses increased 3.0% at the median. Additionally, the percentage of CEOs who received annual bonuses that were at or below target levels increased from 49% in 2012 to 53% last year. Target long-term incentives, the largest component of executive pay in major companies, increased 3.3% at the median in 2013, down from an increase of 9.8% in 2012.

"Most companies are managing their executive compensation programs thoughtfully, responding to continuing pressure from stakeholders to ensure a strong link between pay and performance," said Todd Lippincott, North America leader of executive compensation consulting at Towers Watson. "Given the strength in the stock market and the related growth in value of outstanding stock-based awards, there was less pressure on annual pay adjustments. Stock markets were the real driver of CEO pay in 2013."

The analysis also found that the mix of executive long-term incentives continues to shift to performance-based plans. Nearly 8 in 10 (78%) companies awarded performance-based long-term incentive awards in 2013, compared with 67% in 2011. Meanwhile, 58% of companies awarded stock options in 2013, down from 64% in 2011. Total shareholder return remains the most prevalent performance metric that companies use in their long-term incentive plans. 39% of companies that offer performance awards used this measure in 2013, while 32% used earnings per share.
The fourth year for mandatory say-on-pay votes is off to a relatively positive start, based on Towers Watson's research. Among the 196 of the Russell 3000 companies that disclosed their shareholder voting results by April 11, shareholder support averaged 92%. This is higher than in each of the first three years. Only one company in this sample failed to win majority support for its say-on-pay resolution so far this year. Additionally, fewer companies are receiving negative say-on-pay voting recommendations from proxy advisors.

"Companies have been adapting their executive compensation programs for the say-on-pay environment by eliminating pay irritants, such as tax gross-ups and excessive perquisites, and increasing the emphasis on performance-based incentives. We expect this proxy season to be relatively quiet, although there will always be a few companies where shareholders voice their displeasure through say-on-pay votes," said Lippincott.

Other findings from the Towers Watson proxy analysis include:

  • On average, there was a 28% decline in the change-in-pension-value component included in the SCT among the S&P 1500 companies. Within this group, the largest movement was among the CEOs of S&P 500 companies, who are most likely to have defined benefit retirement programs. S&P 500 companies reported an average decline of 40% in the change-in-pension-value component, compared to an average decline of 17% among small-cap firms.
  • CEO pay movements from 2012 to 2013 varied notably by company size. For example, disclosed SCT pay for the largest companies (S&P 500) actually fell by 3.5% last year, again due to the impact of declining pension values, while pay for the smallest companies in the S&P 1500 rose by 2.5%.
  • 15% of companies provided detailed disclosure of activities they took to engage with shareholders regarding executive compensation in their Compensation Discussion and Analysis. Half of those companies made changes in their pay programs or disclosures in response to shareholder feedback.

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