CEO pay recovers to pre-crisis level

Most companies receiving strong shareholder support for say on pay

By Richard Luss, Tricia Burton and Olivia Wakefield Lee

Compensation for chief executive officers at U.S.’s biggest corporations rebounded strongly in 2010 due largely to improved company performance and a rising stock market, according to a new analysis conducted by Towers Watson, a global professional services company.

The analysis also found that most companies are receiving strong shareholder support for their say-on-pay proposals.

The Towers Watson analysis found that the median total cash compensation, which includes base salary, as well as annual and discretionary bonus payments, increased 17 percent for CEOs in 2010. That compares with a 3 percent median increase in 2009.

Total direct compensation, which includes total cash compensation plus the grant value of long-term incentives, including stock options, restricted stock and long-term performance plans, increased 9 percent in 2010. That compares with a decrease of 1 percent in 2009.

Annual bonuses were a big factor in the double-digit increase in total cash compensation. Nearly three out of four CEOs (72 percent) received bonuses in excess of 100 percent of their 2010 target annual bonus.

That’s the largest percentage of CEOs to have received more than 100% of their target bonus since 2007. Conversely, less than one in 10 CEOs (8 percent) either received no bonus or less than half of their target bonus, a sharp decline from 21 percent the previous year.

“Compensation for CEOs has returned to levels we haven’t seen since before the economic crisis,” said Doug Friske, global head of executive compensation consulting at Towers Watson.

“The fact that CEO pay declined or remained flat in years when corporate profits were weak, and then rebounded when profits and the stock market recovered, clearly demonstrates that the pay-for-performance model is working.”

Compensation discussion changing

The Towers Watson analysis also found that many companies are making changes to the Compensation Discussion and Analysis (CD&A) sections of their proxies. One-half of the companies Towers Watson studied (50 percent) added an executive summary to their 2011 proxy statements, and as a result, nearly two-thirds (64 percent) of companies now include an executive summary.

Additionally, 85 percent disclosed specific performance goals for the 2010 plan year, while more than three-fourths (78 percent) showed actual performance attained for 2010 to support the annual bonuses paid.

“With investors and other stakeholders seeking more clarity in CD&As, it’s no surprise that many companies are taking steps to enhance them,” said Friske. “Companies want to improve their shareholder communication of the linkage between their compensation philosophies and executive pay practices, and many have succeeded in developing documents that allow them to communicate in a simple and straightforward manner. This has been an integral part of the planning process for say-on-pay votes for most companies.”

Strong shareholder support

The analysis also found that companies that have disclosed say-on-pay voting results reported average support of 90 percent of the votes cast, and three-fourths (75 percent) of these proposals have won more than 90 percent support.

Only four companies have failed to win majority support for their say-on-pay proposals to date. Additionally, more than three-fourths (76 percent) of companies have seen majority shareholder support for annual say-on-pay votes. Only one-third (33 percent) of companies recommending triennial votes received majority support.

“Based on our analysis, it appears that most companies are getting it right in terms of their executive pay practices, although many continue to fine-tune their approaches,” Friske said. “In the say-on-pay environment, shareholders and other constituents are watching closely. Companies are well aware that circumstances, perspectives and priorities can change quickly, and there’s no room for complacency.”

Other findings from the Towers Watson analysis include:

• Almost three in 10 (29 percent) companies made one-time and/or retention grants in 2010, compared to 16 percent in 2009. The vast majority of grants in both years were awards that vest solely on the basis of time.

• One-fourth of companies changed the performance measures used for 2010 annual bonuses, while slightly fewer (24 percent) changed performance goals for long-term incentive awards.

Richard Luss is a senior research economist; Tricia Burton is senior executive compensation research analyst; and Olivia Wakefield Lee is a senior practitioner in Towers Watson’s executive compensation practice.