CEO Pay: A 6-Year Low—But Not for Long-Term Pay
June 19, 2017
By Irv Becker, Vice Chairman, Executive Pay & Governance, Korn Ferry Hay Group
For compensation committees, something has had to give for some time. CEOs who are performing well expect to be reward handsomely. Yet board after board continues to be scrutinized by shareholders, activists, and the media, who want longer-term results. There hasn’t been a solution.
But an answer may be emerging—so long as the corner-office crowd can stand being a little more patient.
According to Korn Ferry Hay Group’s 10th Annual CEO Compensation Survey, CEOs’ salaries and bonus increases were at their lowest in six years in 2016, which might leave some leaders feeling shortchanged. After all, they helped produce a 12% total shareholder return, compared to a shareholder return of close to zero the year before. Total revenue was slightly up at 1.6% and net income growth among the companies was 2.6%.
But it turns out boards are still trying to be rewarding, just in a different way—by offering better longer-term CEO compensation vehicles. They are less immediate, but stock awards are up 4.3% to a median $6.3 million. Total long-term incentives grew 4.4% to a median value of $8.8 million. And this is a trend we expect to see more of, as a handy solution to a repeated dilemma.
The new philosophy toward compensation, though, comes with some challenges. There are several ways to best apply it to your company:
Keep a close check on peer groups. While external benchmarking is not new, and in fact is a best practice for all compensation committees, it is more important than ever to ensure boards select the right peer groups, monitoring them closely on a regular basis. Changes in the market can impact the performance and compensation of companies that are used for comparisons, and perhaps may lead compensation committees to fine-tune executives’ compensation accordingly. Keeping in step with competitors’ and market leaders’ compensation practices will also help ensure less turnover in valued talent.
Match the right compensation vehicles to the right objective. We’ve noted incentives intended to motivate future CEO performance are now expiring too early; they are not timed to last as long as the strategic objectives to which they should be linked. The problem is the most significant change in executive compensation design over the last decade has been the shift from primarily stock options (with a typical 10-year exercise period) to primarily performance-vested equity or performance share units (with a typical three-year performance period). Aim to strike an appropriate balance between rewarding excellence short-term and keeping the “carrot” in front to ensure motivation for achieving longer-term objectives.
Share a compelling narrative inside and out to promote understanding of your compensation strategy. Compensation, however structured, will only serve its intended purpose if the CEO understands the vehicles and rewards well. Engage them in any change by making sure they understand that outstanding performance will be appropriately recognized in the context of external pressures on company performance, and help to shift the prevailing mindset from immediate to longer-term rewards. Investors, too, need to be brought along with any compensation shifts.
A compensation strategy aligned with longer-term strategic and investing goals shouldn’t be a tough sell to investors. And more broadly, the board must be prepared to make a strong case for retaining leadership excellence with appropriately structured compensation. Because even the best conceived strategy is useless without the most effective leadership team to ensure its success.