New CEO Comp: Beyond Performance Pay

For decades, the rationale underpinning executive pay has been straightforward: CEOs who boost net income and return more money to investors get raises.

Last year was no exception. According to an early sampling of 50 companies from Korn Ferry’s Compensation Survey indicates that compensation grew sharply thanks to strong corporate performance. But in a surprising shift, compensation committees are altering the mix of what the boss gets paid. For the first time in years, directors lowered the percentage of long-term pay tied to stock options and performance equity awards.

While small—from about 70% to 66%—the shift implies that directors have two things in mind: reward CEOs who deliver on more than just great financial performance and give the highest-performing bosses a hefty financial motivation to stick around. “This was a bit of a reversal from what we’ve seen,” says Irv Becker, vice chairman of Korn Ferry’s Executive Pay & Governance practice. “Compensation committees are thinking about retention as much as performance.”

The data was compiled from 50 public companies that contribute to Korn Ferry’s annual CEO compensation survey. The full study, which will be completed in May, will include statistics from 300 companies, so the percentage values may fluctuate. Nevertheless, Becker belives the early results are “telling.” “The new environment in which organizations and CEOs are judged is leading compensation committees to move to keep high-performing bosses by correcting the pay mix,” he says.

The change in pay composition comes amid an increased focus on all sorts of income issues, including CEO pay ratios, the gender pay gap, income inequality, and more. At the same time, giant institutional investors, such as BlackRock, are demanding that the firms they invest in not only generate good financial returns but also show a positive contribution to society.

To be sure, in absolute terms, CEOs still received more stock options and performance equity rewards in 2018 than they did in 2017. But both incentives fell as a percentage of long-term pay. Restricted stock awards filled in the difference—their percentage of long-term compensation was 30% in 2018, a four percentage-point increase from a year earlier.

“There is some worry about future volatility in the market, so in order to insulate their CEOs from too much variability in year-over-year pay, compensation committees are increasing the percentage of time-based restricted stock and decreasing the percentage of performance-based equity,” Becker says.

Overall, total direct CEO compensation was up 15.2% in 2018 over last year, to $14.4 million (of which $10.5 million was long-term pay). Organizations in the sample had an 8.1% increase in revenue and a 23.2% increase in net income. “From a strategic operating perspective, these companies had a very good financial year, and committees rewarded CEOs across the board,” Becker says.

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Authors

  • Irv Becker

    Vice Chairman, Executive Pay & Governance

    Bio >