Executive and director compensation

Transcription

Executive
and director
compensation
2014
Data, trends and strategies
Executive compensation year in review series
Executive and director compensation 2014 | Data, trends and strategies
2
Contents
Executive and director compensation: 2014 year in review
3
CEO compensation
4
Short-term and long-term incentive plan performance measures 10
Performance-based stock options
15
Restricted stock and restricted stock unit prevalence
21
Executive perquisites: Prevalence
24
Director compensation and benefits survey
27
Lead director compensation
33
Director stock ownership guidelines and holding requirements
36
Non-CEO chairman compensation: Executive and non-executive positions
41
An experienced partner: Your Hay Group team
48
Copyright © 2014, Hay Group. All rights reserved.
3
Executive and director compensation: 2014 year in review
During 2014, Hay Group conducted studies and analyses on various aspects of executive and
director compensation for The Wall Street Journal. We began in May 2014 with an examination
of CEO compensation at the 300 largest US companies that filed their final definitive proxy
statement between May 1, 2013 and April 30, 2014 (“Hay Group 300”). This study furnished a
snapshot of total compensation as disclosed in each company’s proxy statement and our findings
appear in the first summary in this compilation.
As 2014 proceeded, we examined various other topics affecting executive or director
compensation – whether as to amounts or prevalence – among the Hay Group 300. Hot topics
such as performance measures and perquisites were reviewed as well as key aspects of director
pay and roles. Together with the CEO compensation study, our analyses provide a coordinated
picture of how the largest US public companies handle some of the most important issues in their
relationships with their top executives and board members.
4
CEO compensation
Study of 2014 Hay Group 300 CEO pay levels
CEO compensation showed solid increases in 2013 for the first time since 2010 while shareholder
perception remained “front and center” among compensation decision-makers. Overall the
delivery of pay remained highly volatile and performance-based in a record year for companies
and their shareholders.
A banner year for shareholders yields solid gains in pay levels
In our annual study of CEO compensation, which we conducted with The Wall Street Journal,
we analyzed CEO pay at the Hay Group 300 against last year’s record-breaking performance for
shareholders. In determining a CEO’s pay we used his or her total direct compensation (TDC),
which consists of salary, bonus or other annual incentives paid and any long-term incentive
awards (long-term stock or cash) granted.
CEO compensation increased solidly during 2013, but its growth trailed stock market gains and a
remarkable 33.8 percent total shareholder return (TSR). Companies were also more profitable in
2013, with a median net income growth of eight percent.
However, GDP growth in the US and globally was stagnant, most measures of productivity were
down and inflation was modest, yielding very little top-line growth for most companies. Greater
profitability instead was achieved through enhanced efficiency and low wage growth. After years
of issuing debt to take advantage of historically low interest rates, companies reaped the benefits
of having invested in their core businesses and managed to “do more with less.”
And the winners were...
CEO compensation changes and values, 2013
6.0%
5.0%
5.5%
4.0%
4.0%
3.0%
3.7%
3.8%
2.0%
1.0%
1.7%
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Individual values are medians that should not be added
As a result of this performance, 2013 saw the first material uptick
in CEO pay levels since 2010. Base salaries grew 1.7 percent to $1.2
million, while annual incentive payments increased for the first
time since 2010 by four percent to $2.3 million. Together, these
factors resulted in an overall increase of 3.7 percent in median
cash compensation, to $3.6 million.
Further, long-term incentive (LTI) grants increased, growing 3.8
percent to $7.9 million – leaving total direct compensation with a
healthy 5.5 percent growth to $11.4 million.
For the second year in a row, the largest pay increases were
seen in the utilities sector, where pay levels increased 15.9
percent – despite a median 0.2 percent drop in net income and
a comparably modest 10.3 percent one-year TSR – all during a
volatile weather year. Utilities struggled for a variety of reasons
in 2013, including ongoing concerns about the Fed’s tapering of
bond purchases, rising interest rates, lower natural gas prices and
an improving US economy. All of these factors made investors
more willing to exit the safety of high-yield utility stocks.
On the other end of the spectrum, oil and gas company pay
remained flat, at negative 0.1 percent – a result supported by the
survey’s lowest net income change, at negative 6.8 percent (despite
a very healthy 27.1 percent return to shareholders). 2013 was a
mixed year for the sector: oil prices and demand peaked, but an
oversupply of new natural gas sources drove gas prices down.
CEO pay in the heavily-watched financial services sector saw a
major reversal in 2013. For the first time since the financial crisis,
pay levels increased by a robust 12.9 percent. Many banks found
success in 2013 after years of rebalancing their business portfolio
away from classic capital markets businesses and into more stable
wealth management offerings. As a result, financial services
companies made up the highest-performing sector in Hay Group’s
study, showing greatly improved profitability at 15.4 percent – and
the survey’s highest shareholder return of 43.5 percent.
Realized long-term incentive (LTI) pay
remained strong
For the third year in a row, CEOs realized significant compensation
in the form of “realized” or take-home equity-based pay. After
2012, when realized pay increased to record levels, 2013 saw
realized LTI nearly flat at $7.9 million. Take-home pay from stock
option exercises declined as companies used fewer of them,
while realized compensation from time-vested restricted stock
and performance awards increased. These historically high levels
of realized pay are reminders that today’s pay schemes provide
CEOs with the potential for much more volatile pay outcomes
than in the past.
Long-term performance plans continued
their steep incline
Pay designs in 2013 set CEOs up for increasingly volatile pay
outcomes. For the third year in a row, long-term performance
plans were the most heavily-weighted piece of the entire
pay puzzle, making up 32.3 percent of the average CEO’s
total compensation, up from 30.3 percent the year before.
Performance awards outpaced bonuses – a similarly volatile
element that ranked second in pay emphasis – making up 22
percent of the average CEO’s pay package.
6
Shareholders consider performance awards the most important
element within a CEO’s pay package, as most of these plans only
vest when a company achieves prescribed objectives. Some
companies have implemented these plans as a way to appease
their shareholders’ concerns about pay and performance, while
other companies are using the plans to align the senior team
around key long-term milestones.
Change in CEO LTI mix, 2012–2013
Stock options/SARs
2012 LTI
28%
2013 LTI
27%
0%
20%
Restricted stock
49%
23%
22%
40%
Performance awards
51%
60%
80%
100%
Percentage of LTI
Includes only constant incumbents
Change in CEO LTI prevalence, all incumbents, 2012–2013
2012
2013
215
Performance awards
249
147
167
Restricted stock
166
Stock options/SARs
187
0
50
100
150
200
250
Number of companies
Includes only constant incumbents
At 51 percent of total award value, performance awards made up
more than half of CEOs’ LTI in 2013, up slightly from 49 percent
in 2012. The number of companies that continued to add such
plans rose to a record 83 percent of all companies, up from 72
percent in 2012. At 27 percent of CEOs’ total award value, stock
options remained the second most heavily-used pay vehicle, with
62 percent of companies granting them (up from 55 percent in
2012). Finally, at 22 percent of the total award value, time-vested
restricted stock continues to be used in 56 percent of companies
(up from 49 percent in 2012).
7
With the prevalence of all three vehicles increasing, companies
continued the trend of providing their CEOs with a portfolio of
long-term incentives. Seventy-nine percent of companies granted
more than one vehicle, with 31 percent of companies reporting
the most widely-used combination consisting of all three
LTI vehicles (stock options, restricted stock and performance
awards). The next most popular mix, of stock options and
performance awards, dropped in prevalence among companies
from 27 percent to 25 percent. The combination of performance
awards and restricted stock remained flat, at 18 percent of
companies. Notably, the least-used LTI program in 2013 was the
most commmon just 10 years earlier: less than four percent of
companies now use only stock options.
Pay and performance
Once again, top-performing CEOs out-earned all others in 2013
by a significant margin. However, bottom performers didn’t
necessarily see the declines in pay that might be expected.
The top third of net income performers improved their
profitability by a median level of 36 percent and saw a 7.2 percent
increase in cash compensation as a result. However, the lower
third of performers saw their profitability decline by more than
20 percent, coupled with a drop in cash compensation of only
1.1 percent. All told, top performers fared only eight percentage
points better in cash pay increases than low performers, despite
huge differences in profitability.
Over the longer term, when comparing realized LTI pay to threeyear TSR, top performers outgained low-performing CEOs by a
substantial margin, but did not outgain middle performers by a
significant amount. The top third of TSR performers realized $12.1
million in 2013 for TSR performance of 29.1 percent, while the
bottom third made only $3.2 million for 3.1 percent TSR. However,
the middle third realized $8.1 million, despite TSR that was just
more than half (at 16.5 percent) of the top performers.
Both results are likely diluted by the strong stock price
performance for companies in 2013, which may have been
enough to make both shareholders and compensation decisionmakers less sensitive to pay outcomes for the year.
Where it’s all headed
Despite progress in “bullet-proofing” pay programs in recent
years, companies continued to keep the pressure on paying for
performance in 2013. However, the jury’s still out on whether
or not these programs will withstand scrutiny in a year when
shareholders don’t win.
During the last four years of shareholder input (“say-on-pay”),
a bull market provided ever-increasing returns to shareholders.
Over that period, companies have continued to make more
money, grow and create value for shareholders.
8
Looking back
In retrospect, the increasing performance volatility in today’s
executive pay packages couldn’t have come at a better time
for CEOs. They continue to realize more pay than at any point
before – in large part because their equity stakes have vested
at materially higher prices than when they were granted,
and they’ve often vested at above-target levels. In addition,
companies with four straight years of high say-on-pay approval
outcomes may begin to feel that their pay programs aren’t at risk
of negative shareholder sentiment.
However, the true test of these programs only will be seen
during a period of contraction, when growth slows or reverses or
shareholders lose value. Given the performance volatility inherent
in today’s CEO pay packages, a contraction will yield realizable
pay values that are far lower than what CEOs are seeing today.
In that year, pay programs will be put to the test. Will
shareholders support a pay program at a 95 percent approval
in a year when they’ve lost 15 percent of their value? Will
compensation committees that see their executives’ realizable
pay decline in that same year look to re-load them the next year,
as happened in 2009?
9
Looking ahead
For 2014, we expect companies to continue to close the
narrowing gap between their pay programs and shareholder
perception. We expect to see greater use of “realizable pay”
disclosures that better align the intrinsic value of LTI awards with
company performance, further movement to performancevested equity plans and continued eliminations of perquisites. In
short, we anticipate more “performance-based” pay – and even
more volatility on potential pay outcomes.
The danger in this trend towards greater volatility is that it may
not be right for every company. While pay has undoubtedly
become more performance-based, not every company has the
type of volatility inherent in their business outcomes to support
extreme pay volatility. When the difference between a “poor” and
“great” performance year lies in a relatively narrow range, does it
make sense for a CEO’s incentives to range from zero to double a
large target incentive?
This is the paradox of over-reliance on market practice.
Companies want to know how their peers are doing things,
and to keep abreast of industry trends and “best practices.”
However, in that process, the opportunity for a company to
create a misalignment with their business becomes dangerously
real. Effective pay programs tailor to the strategic needs of the
company while doing enough to head off shareholder concerns.
Executive and director compensation 2014 | Data, trends and strategies 10
Short-term and long-term incentive plan performance measures
As companies and boards have become increasingly interested in selecting the appropriate
performance measures for incentive programs at their organizations, the Hay Group 300
companies were examined to determine which performance measures were used in short-term
and long-term incentive plans.
Short-term incentive (STI) plan performance metrics
All (100 percent) of the Hay Group 300 companies that had a STI plan disclosed the performance
measures used in 2013. The most common STI performance metric was some form of earnings
metric (earnings, profits, net income, pre-tax net income, operating income, EBITDA or earnings
per share (EPS)) mentioned by 91.6 percent of the 296 companies disclosing performance metrics.
Individually, the most common STI plan metrics were sales/revenues (44.9 percent), earnings per
share (40.2 percent), operating income (39.5 percent), cash flow (30.7 percent), meeting strategic
goals (29.7 percent), expense control/cost containment (19.9 percent), safety
(18.2 percent), after-tax net income (16.9 percent), EBITDA (16.9 percent), return on investment
(ROI)/return on invested capital (ROIC) (16.2 percent) and customer satisfaction (14.5 percent).
Discretionary goals were disclosed at 12.5 percent of the sample
versus 10.9 percent last year. Over one-half of the companies
(50.7 percent) of the sample mentioned factoring individual
performance into their review.
Operational goals: 9.1 percent
Multi-year STI plan performance metrics, 2012–2013
Earnings (not further defined): 5.7 percent
2012
2013
40%
Quality: 7.1 percent
Acquisitions: 4.7 percent
Total shareholder return (TSR): 4.4 percent
New product/business development: 4.4 percent
20%
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Unit/division goals: 4.1 percent
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Employee/management development: 7.4 percent
Return on assets (ROA): 5.1 percent
60%
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Diversity: 7.8 percent
Other STI plan performance measures mentioned 10 or more
times include:
Leadership: 9.8 percent
Environmental performance: 9.8 percent
Pre-tax net income: 9.5 percent
Return on equity (ROE): 9.1 percent
Efficiency: 3.7 percent
Succession planning: 3.7 percent
Health performance: 3.4 percent
Almost three-quarters (72.3 percent) of the sample used four
or more short-term incentive plan performance metrics in 2013,
while only 4.7 percent of the sample used only one performance
metric.
Multi-year prevalence: increases/decreases
in prevalence of STI performance metrics
During the last year, sales/revenues became the most common
individual STI plan performance measure, increasing to 44.9
percent from 41.3 percent the prior year.
Gross margin: 9.1 percent
Other measures that increased substantially also included
operating income (from 33.4 percent to 39.5 percent), meeting
strategic goals (from 22.5 percent to 29.7 percent), ROI/ROIC (from
13.3 percent to 16.2 percent), expense control/cost containment
(from 17.4 percent to 19.9 percent) and safety (from 17.1 percent
to 18.2 percent). Measures that declined in comparison to the
previous year included earnings per share (from 41.3 percent to
40.2 percent), after-tax net income (from 18.4 percent to 16.9
percent) and customer satisfaction (15.4 percent to 14.5 percent).
earnings metric (earnings, profits, net income, pre-tax net income,
operating income, EBITDA or earnings per share) reported by 60.2
percent of the 274 companies disclosing performance metrics.
Number of STI plan performance metrics in use, 2013
Multi-year LTI plan performance metrics, 2012–2013
Individually, the most common LTI plan performance metrics
were total shareholder return (50.7 percent), earnings per share
(33.9 percent), ROI/ROIC (27.4 percent), sales/revenues (18.2
percent), cash flow (15.0 percent) and operating income (15.0
percent).
60%
One, 4.7%
Two, 10.1%
2012
2013
50%
Six or more, 40.2%
40%
Three, 12.9%
30%
20%
10%
Five, 15.5%
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Of the Hay Group 300 companies, 92.3 percent of those that had
an LTI plan disclosed the performance measures used in 2013. The
most common LTI plan performance metric was some form of
To
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Other LTI plan performance measures mentioned ten or more
times include:
Return on equity: 9.9 percent
Number of LTI plan performance metrics in use in 2013
Four or more, 17.4%
Two, 33.4%
EBITDA: 9.1 percent
Four or more
After-tax net income: 6.6 percent
Two
Pre-tax net income: 5.5 percent
Stock price: 5.1 percent
Return on assets: 4.4 percent
Gross margin: 4.4 percent
Expense control/cost containment: 3.6 percent
Only 17.4 percent of the sample used four or more LTI plan
performance metrics in 2013; over one-quarter (27.1 percent) of
the sample used only one performance metric.
Multi-year prevalence: Increases/decreases
in prevalence of LTI performance metrics
The goals that changed the most include TSR (which increased
from 47.1 percent to 50.7 percent), operating income (up from
12.5 percent to 15.0 percent), EPS (rose from 31.9 percent to 33.9
percent), ROIC (up from 25.5 percent to 27.4 percent) and sales/
revenues (down from 19.4 percent to 18.2 percent).
Three
Three, 22.1%
One
One, 27.1%
Relative performance measures are here to stay
During the last year, the disclosure of relative performance
measures has gained more interest as most plans that use total
shareholder return as a metric employ a relative comparison to
peer groups. Typically, the peer group was a defined sample of a
specific number of comparable companies, the S&P 500 (or some
other large defined index) and/or an industry peer group index
(such as a defined S&P 500 industry comparison like the S&P 500
Electric Utilities, the S&P 500 Health Care companies or some
other group such as the Philadelphia Utility Index).
For STI plan performance metrics, only 4.4 percent of the
companies disclosed TSR as a performance metric and all of
them reported the use of relative performance metrics; only
one company specifically also mentioned using an absolute TSR
measure. However, some companies also mentioned using other
relative performance measures such as net income, EPS, sales/
revenues and ROIC.
For LTI plan performance metrics, 50.7 percent of the companies
disclosed TSR as a performance metric, with 97.8 percent of
these companies reporting use of a relative performance metric;
only seven companies specifically mentioned using an absolute
TSR measure. Similar to the STI plan performance metrics, some
companies also disclosed using other relative performance
measures such as EPS, ROE and ROCE.
These findings suggest that relative performance measures
are here to stay.
The multi-year prevalence data for long-term incentives shows
the largest growth in TSR and operating income, while the largest
decline was in sales.
Looking ahead
We expect more companies will add non-financial performance
metrics to their STI performance plans. At the same time
companies likely will continue and add to their use of financial
performance metrics.
We don’t anticipate seeing LTI plan performance metrics change
much in the near future.
What does the future hold for STI and LTI
plan performance metrics?
The multi-year prevalence data for STI demonstrates continued
growth in many financial and non-financial performance
measures such as sales, operating income, meeting strategic
goals, ROI/ROIC, expense control/cost containment and safety.
Some of the financial and non-financial performance measures
that declined in prevalence include earnings per share, after-tax
net income and customer satisfaction.
Performance-based stock options
Prompted by the focus in recent years on “performance” criteria in structuring executive pay
arrangements, we examined the use of performance-based stock options among the Hay Group
300. To date, performance-based stock options – which for purposes of our study included
performance-based stock appreciation rights (SARs) – have not constituted a prevalent form of
executive reward. Nevertheless, we found that, while stock option grants declined in prevalence
among the Hay Group 300 in each of the past five years except 2013, performance-based stock
options rose each of the past five years except 2013.
Stock option definitions
The typical “plain vanilla” stock option is a time-vesting vehicle where the individual is granted
the right to purchase a defined number of shares at a specified price – typically fair market
value – over a defined period of time. Often the option is exercisable only after a waiting period
(commonly one year); the optionee then can exercise the option in full (cliff vesting) or in a set
number of installments (ratable vesting, with typically three or four equal annual installments tied
to anniversaries of the grant date).
Stock options are either:
Non-qualified: the optionee owes no income tax when granted
but must pay ordinary income tax on the spread between the
exercise (strike) price and the market price of the stock when
exercised; or
Incentive: the optionee owes no income tax at grant or on
exercise of an incentive stock option (ISO), as the taxation is
deferred until the stock is sold. At that time, the option gain is
taxed at long-term capital gains rates if the sale is at least two
years after grant and one year after exercise. However, unlike a
non-qualified stock option, an ISO award is not deductible by
the company (unless it later is disqualified). In addition, ISOs are
an income tax preference item for purposes of the alternative
minimum tax and have a number of other potential complications
that in recent years have limited their use outside of certain types
of companies (e.g., start-ups), industries (e.g., tech) and locales
(e.g., Silicon Valley).
Other forms of stock options evolved over time, including
premium stock options, discount stock options, indexed stock
options and performance-based stock options.
Premium stock options: The stock option exercise price is set at
greater than market value, so the market value of a share must
rise a specified percentage or to a specific price before the stock
option is in the money. Where used, we often see a 10 percent, 15
percent or 25 percent premium.
Discount stock options: The stock option exercise price is set
at lower than the market value of a share at grant, which means
that a discount option’s market value is already in the money at
grant. Such options have largely disappeared due to accounting,
income tax, governance and exchange listing rule changes
and requirements.
Indexed stock options: The stock option exercise price is linked
to the performance of an index, such as the S&P 500 or a peer
group index. Thus the exercise price of the option can fluctuate
above and below market value as the index’s value fluctuates; for
the indexed option to have value, the company’s performance
must outperform the index. Indexed options have had limited
usage to date.
Performance-based stock options: The stock option is not
exercisable until certain specific conditions are met (e.g., the
share price must attain a specific level or the company must meet
certain goals). Performance-based stock options are commonly
categorized in one of two buckets:
Performance-contingent stock options: The stock option may
only be exercised if certain specified goals are attained.
Performance-accelerated stock options: The stock option
exercise schedule may be accelerated if certain specified
goals are attained. For example, stock options may be
exercised after a defined long period of time (e.g., five
years to 9.5 years) whether or not goals are met. If the
goals (which may be market-based or financial-based, with
differing accounting considerations) are satisfied, the vesting
accelerates to a shorter time period.
One other form of stock option – the performance-granted stock
option – is not captured here as a performance-based stock
option because its exercise is not conditioned upon meeting
performance goals. Rather, the company sets a short-term
period (often one year) over which certain goals must be met
for the stock option to be granted. The award vehicle actually is
more like a performance share that has a one-year performance
cycle, with payment (after meeting the targets) made in the form
of stock options.
Stock option growth
Stock options grew in popularity during the 1970s and 1980s,
and were the leading LTI vehicle through the 1990s. But stock
options had their share of controversy even then, especially
increasingly large awards. “Mega-grants” of stock options at times
were awarded to CEOs as an inducement to lure them to a new
company. CEOs whose stock option mega-grants made the most
noise include Lee Iacocca at Chrysler and Michael Eisner at Disney.
At one point, Mr. Eisner had many hundreds of millions of dollars of
potential option gains. In fact, he exercised options on over seven
million shares, reaping a gain of almost $600 million.
Soon shareholders, shareholder activists and the press began
criticizing the continuing growth in option mega-grants.
Ultimately, accounting and securities regulators took actions
that diminished the attractiveness of stock options. After years
of debate among interested parties, the Financial Accounting
Standards Board (FASB) announced a shift in the financial
treatment of stock options in March 2004 when it released a
draft accounting statement (whose principles subsequently
were adopted by FASB) titled Share-Based Payment, providing
for the grant date value of a stock option to be expensed over
the vesting period of the option. The Securities and Exchange
Commission acted in 2006 by adopting new reporting
requirements that included performance information.
In reaction to these regulatory changes and to shareholders’
growing desire for performance criteria in executive awards,
companies reduced or even eliminated stock option programs
while adding performance-based programs (e.g., performance
shares or units, performance restricted stock or units, performance
units or performance cash).
Performance stock options prevalence
Eligibility for performance stock option grants
During the past five years, the prevalence of performance-based
stock options has grown every year except between 2012 and 2013.
However, the number of overall stock option grants made between
2012 and 2013 rose for the first time in this five-year period.
At each company that awarded any performance-based stock
options in 2013, the CEO was one of the option recipients. The
executives who received grants in 2013 were:
Named executive officers: 53.3 percent
Performance stock option prevalence, 2009–2013
Executive leadership team: 6.7 percent
15%
Management team: 6.7 percent
10%
10.2%
8.0%
5%
0%
CEO only: 33.3 percent
2.5%
2009
4.0%
2010
4.7%
2011
Special one-time performance stock option grants were not the
norm in 2013, but such awards had been more common in past
years. Similarly, mega-grants have declined in prevalence.
Performance metrics
2012
2013
Note: These figures cover companies making option grants in the
relevant data year, not the full 300-company sample. For example,
there were only 187 of the 300-company sample making CEO stock
option grants in 2013.
Over the three-year period of 2011 to 2013, the prevalence of
performance-based stock option grants was 13.9 percent in the
aggregate, while the prevalence over the five-year period of 2009
to 2013 was 18.7 percent in the aggregate. This means that almost
one out of every five companies among the Hay Group 300 that
awarded stock options made a performance-based option grant
at some time within the last five years.
Accelerated or contingent vesting of performance stock options
is typically based upon achievement of market-based or financial
goals. The market-based performance metric disclosed most
often is stock price appreciation (reported by 40 percent of
the companies). Various earnings-related metrics (which are
financial-based goals) also were disclosed by 40 percent of the
companies. Since the financial expense differs for market-based
performance awards and for financial-based performance awards,
accounting treatment needs to be considered at the time that the
performance metrics are being determined.
Below is a list of the performance measures disclosed in the proxy
statements; since a number of companies mentioned multiple
performance metrics, the totals exceed 100 percent:
Stock price appreciation: 40.0 percent
Earnings-related metrics: 40.0 percent
−− Earnings per share: 20.0 percent
−− Earnings: 6.7 percent
−− EBITDA: 6.7 percent
−− Operating income: 6.7 percent
Total shareholder return: 3.3 percent
Revenues: 6.7 percent
Return on assets: 6.7 percent
The use of stock price appreciation as a performance measure is
interesting because the share price is already a determinant of the
option’s value to the optionee. As is the case for any stock option,
the executive profits only to the extent that the stock price
increases. With a performance stock option whose exercisability
is based on stock price appreciation, the executive receives the
same profit as from a regular option, but the profit is delayed
until specific stock price hurdles are achieved; if not achieved,
performance-contingent stock options will be forfeited.
Performance cycle
Similar to regular stock option awards, the typical performance
stock option grant has a three-year performance cycle.
Performance cycles disclosed in company proxy statements were
(all figures rounded to the nearest 0.1 percent):
Free cash flow: 6.7 percent
3 years: 60.0 percent
Individual performance goals: 6.7 percent
1 year: 13.3 percent
Among the companies that use stock price appreciation as a
performance measure, the median amount of appreciation over
market value on grant date that was required for the options to
become fully exercisable was 40 percent; stock price appreciation
ranged from a low of 15 percent to a high of 153 percent.
Performance stock options versus
performance stock appreciation rights
What is the future for performance-based
stock option grants? Are they here to stay?
The performance-based stock option grants made in 2013 were
primarily based on stock options (rather than SARs) as follows:
Performance-based stock option awards have been around for
many years and we expect to see them continue to be used by
more companies, especially as an inducement to attract and
retain new CEOs.
Performance stock options: 66.7 percent
Performance stock appreciation rights: 33.3 percent
Performance-contingent versus
performance-accelerated
Not that many years ago performance-accelerated stock options
were far more common than performance-contingent stock
options. However, times have changed and performancecontingent stock options have become the favored approach.
In fact, 80 percent of the performance-based grants are now
performance-contingent and 20 percent are performanceaccelerated.
The main reason for this change related to accounting
considerations. Before the accounting changes that resulted in
the expensing of all stock options, performance-accelerated stock
options could avoid the variable (liability) accounting treatment
which applied to performance-contingent stock options. Once
the new accounting rules took effect, such acceleration no longer
was needed for the more favorable accounting treatment and
performance-contingent stock options then overtook their
performance-accelerated brethren.
Restricted stock and restricted stock unit prevalence
According to our research on the Hay Group 300 companies, restricted stock/RSUs together
constitute one of the most widely used incentives used.
Restricted stock and RSU definitions
The typical restricted stock grant to an executive applies to a specific number of shares that are
nontransferable and subject to forfeiture until one or more conditions are satisfied. In most cases,
one condition is continued employment for a defined period of time (often three or four years).
During this restriction period the individual has certain ownership rights but cannot dispose of
the shares until the restrictions lapse. However, recipients of restricted shares can receive, if so
provided in the governing documents, earnings/dividends on the shares and can vote the shares.
RSU grants carry similar restrictions, but the award does not have any such ownership type
benefits such as receiving earnings/dividends or being able to vote the shares. In this situation,
the compensation committee can still elect to provide the individual “dividend equivalent rights”
which may be paid in shares and/or in cash.
Besides time-based vesting, other vesting conditions may include
meeting certain performance-based goals:
Performance-contingent goals: awards carry performancebased restrictions that can only be removed if the
performance conditions are met
Performance-accelerated goals: awards contain
performance-based restrictions that accelerate the removal
of the restrictions if the performance conditions are satisfied
Performance-granted goals: awards include a short
performance period, typically one year, during which
performance-based goals must be met in order for restricted
stock or RSUs to be granted.
Restricted stock and RSU prevalence
In order to determine the actual prevalence of restricted stock
and RSUs, it was necessary to combine the prevalence of the
following vehicles:
Short-term/annual incentives
After consolidating the prevalence of the types of restricted
stock and RSU grants listed above, we found that 82.3 percent
(247 companies) of the Hay Group 300 awarded some form of
restricted stock or RSUs in 2013. Clearly, restricted stock and/
or RSUs are one of the most widely used incentives across the
300-company sample.
Here is a breakout of the type of restricted stock/RSU grants
made to executives in this year’s Hay Group 300 companies (note
that the totals on this page and the next exceed 100 percent as
some companies employ more than one approach).
Short-term/annual incentives
Restricted stock as an annual incentive payment vehicle:
1 company (0.3 percent)
RSUs as an annual incentive payment vehicle: 13 companies
(4.3 percent)
Long-term incentives
Restricted stock grants: 53 companies (17.7 percent)
Restricted stock as an annual incentive payment vehicle
RSU grants: 147 companies (49.0 percent)
RSUs as an annual incentive payment vehicle
Performance restricted stock grants: 20 companies
(6.7 percent)
Long-term incentives
Restricted stock grants
Performance RSU grants: 80 companies (26.7 percent)
RSU grants
Performance-granted restricted stock awards: 3 companies
(1.0 percent)
Performance restricted stock grants
Performance-granted RSU awards: 6 companies (2.0 percent)
Performance RSU grants
Performance-granted restricted stock awards
Performance-granted RSU awards
Restricted stock or RSUs
Restricted stock taxation versus RSU taxation
While restricted stock has been an incentive vehicle far longer
than RSUs, in recent years RSUs have become much more popular.
Reasons for the attractiveness of RSUs include that, for an RSU
grant, (1) company stock is not issued at the time of the grant,
(2) tax deferral can be obtained through timely elections that
accord with Internal Revenue Code section 409A and (3) when
the restrictions are satisfied, the company can elect to distribute
shares or their cash equivalent to the recipient if so permitted
in the governing documents. Obviously, the RSU grant provides
the company with additional choices that are unavailable when
making restricted stock grants.
Restricted stock grants and RSU grants are not taxed at the time
of award; rather, in most cases, they are taxed at vesting.
For this year’s Hay Group 300, 65 companies (21.7 percent) made
some form of restricted stock grant and 192 companies (64.0
percent) made some form of RSU grant. Thus, RSU awards were
almost three times more popular than restricted stock grants.
For restricted stock grants, the entire amount of the vested stock
is ordinary income in the year of vesting. If the individual does not
sell the stock at vesting and disposes of it at a later date, then the
difference between the sale price and the fair market value on the
vesting date will be reported as a capital gain or loss.
If the individual has made a “section 83(b) election” (which, if
timely made, allows the fair market value of the shares to be
taxed as ordinary income at grant date rather than at the vesting
date), then capital gains treatment starts at the time of grant
and not at vesting. While this election can reduce income taxes
substantially if the stock price at vesting is higher than at date
of grant, the pros and cons of such an election requires careful
analysis before proceeding.
For RSU grants, there can be no section 83(b) election because no
actual stock is issued at date of grant. Thus the value of the stock
is reported as ordinary income in the year it vests, unless the plan
allows the employee the ability to defer receipt of the payment
until some future specified date.
Executive perquisites: Prevalence
In an examination of executive perquisites among the Hay Group 300 companies for the 2014
proxy season, the most common perk continued to be the personal use of corporate aircraft
(disclosed by 65 percent of the sample), followed by financial (tax/estate) planning (offered by
48 percent), company cars (39 percent), security (35 percent), supplemental life (34 percent) and
physical exams (34 percent).
Prevalence of perquisites, 2012–2013
70%
60%
50%
2012
2013
40%
30%
20%
10%
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The previous graph, Prevalence of perquisites, 2012–2013, shows
that the majority of the significant perquisites have declined in
prevalence since last year. In fact, the only major perquisite to
increase in usage among the Hay Group 300 was supplemental
disability which went from 13.3 percent to 16.1 percent.
Some of the other perquisites that continue to be offered by the
300 companies, while not included in the above chart, include:
Parking: 7.0 percent
Company products/discounts: 7.0 percent
Perquisite allowance: 5.3 percent
Personal use of property: 3.7 percent
Legal counsel: 3.0 percent
Gifts: 3.0 percent
Supplemental medical: 2.0 percent
Supplemental dental: 2.0 percent
Personal aircraft usage
Personal aircraft usage remains the most costly CEO perk at a
median value of $105,281 (compared to $103,231 in last year’s
sample). Perquisites are disclosed in the All Other Compensation
(AOC) column of the proxy’s Summary Compensation Table and
this one perk makes up over one-half of the AOC’s median value
of $198,931.
Value of CEO’s personal aircraft usage
2011
All other compensation
Personal aircraft usage
75th Percentile
$427,425
$220,500
Median
$198,931
$105,281
$76,644
$49,975
25th Percentile
Long-term prevalence shows perquisites have
declined substantially
While fewer companies in 2013 disclosed cuts to specific
perquisites, the next graph, Prevalence of perquisites, 2008–2013,
shows that most major perquisites declined in prevalence over
this period. For the sixth year in a row, the “most eliminated
perk” was tax gross-ups on perquisites. Over the six-year period,
tax gross-ups on perquisites dropped from 46 percent to 12.7
percent of each year’s sample. Other perquisites that declined
substantially include clubs (from 35 percent to 16 percent),
spousal travel (from 38 percent to 20 percent) and cars (from
52 percent to 39 percent). Nevertheless, a few of the major
perquisites did increase over the five year period, including
security (from 21 percent to 35 percent), supplemental life
(from 24 percent to 34 percent) and supplemental disability
(from nine percent to 16 percent).
The future of executive perks
Prevalence of perquisites, 2008–2013
70%
60%
50%
2008
2013
40%
30%
20%
10%
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Su
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During the past six years, we’ve seen most companies discontinue
one or more perquisites. While some companies have dropped all
perks, the common practice is to include at least one executive
perquisite. Twenty-seven of the Hay Group 300 companies did
not list any perks in their 2014 proxy statement; that compares
to 25 companies last year and only 12 companies two years ago.
The other 273 companies listed perks that, for the most part,
contribute to the health and well-being, of covered executives.
As we anticipated last year, there were no major changes in
perquisites prevalence during 2013. We saw companies continue
to eliminate most major perquisites while a few perquisites did
increase in prevalence.
Director compensation and benefits survey
In 2014, we reviewed proxy disclosures of the Hay Group 300 to access director compensation
and benefits, lead director pay, director stock ownership guidelines and holding requirements,
and non-CEO chairman compensation for both executive and non-executive positions.
Overview
At a high-level, the big news was that director retainers climbed, while fewer companies paid fees
to their directors for attending board meetings.
From a long-term incentive perspective, director stock options have faded away almost
completely, with full-value awards taking their place.
In the past, being a director might have been an ancillary job that provided some supplemental
income. With the continual imposition of regulatory requirements and the constant scrutiny by
investors and governance watch-dogs, directors are taking on more and more responsibility and
pay levels are following suit.
Annual compensation
The annual compensation of a typical non-employee director includes an annual retainer for
board service, meeting fees for board and committee service and an annual retainer for chairing
a committee or serving as a member of a committee. In this section, we review details about each
type of compensation.
Annual retainer
Director compensation: Meeting fees
For the second year in a row, 99.3 percent of the Hay Group
300 paid directors an annual retainer in the form of cash and/
or equity. The median annual retainer rose from $90,000 to
$100,000.
75th percentile
Equity
Total
$100,000
$150,000
$150,000
Median
$85,000
$130,000
$100,000
25th percentile
$75,000
$112,000
$75,000
293
79
298
Cases
Meeting fees
The percentage of the Hay Group 300 that paid directors a
meeting fee for attending board meetings dropped from 26
percent to 23.3 percent. The median board meeting fee remained
stable at $2,000. Meanwhile, 28.3 percent of companies paid a
median fee of $1,750 for compensation committee attendance
($50 less than last year), an identical percentage of companies
paid a median fee of $2,000 for audit committee attendance
(same as last year) and 27 percent of companies paid directors
a median fee of $1,500 for nominating committee attendance
(down $200 from last year).
Audit
Comp
Nominating
75th percentile
$2,000
$2,000
$2,000
$2,000
Median
$2,000
$2,000
$1,750
$1,500
25th percentile
$1,500
$1,500
$1,500
$1,500
70
85
85
81
Cases
Director compensation: Annual retainer
Cash
Board
Committee chairperson retainers
A large majority of the Hay Group 300 paid directors a retainer in
2013 for serving as a committee chairperson. For example, 97.3
percent of the 300 companies paid their audit committee chairs
a median retainer of $20,000 (the same amount as the previous
year). A slightly lower percentage (95.7 percent) of the companies
in our sample paid the compensation committee chairs a median
retainer of $15,000 (also the same as last year). Meanwhile, 91.3
percent of the Hay Group 300 paid their nominating/governance
committee chairs a median retainer of $15,000 (up from last year’s
figure of $11,000).
Retainers when the director is a committee chairperson
Audit
Comp
Nominating
75th percentile
$25,000
$20,000
$15,000
Median
$20,000
$15,000
$15,000
25th percentile
$20,000
$15,000
$10,000
292
287
274
Cases
Committee member retainers
Long-term incentive compensation
The practice of paying directors a retainer for serving as a
member of a committee continues to be a minority practice. The
percentage of the 300 companies paying a retainer to members
of their audit committee ticked upward from 38 percent to 39.3
percent, while the median retainer remained at $10,000. The
same median retainer was offered to members of compensation
committees by 25 percent of companies (up one percentage
point from the previous year). Companies were least likely to
offer retainers to members of their nominating/governance
committees, with only 22 percent of companies offering a
retainer, with a median of $7,750 (up from 20 percent and $7,500
the previous year).
Companies continue to move away from granting stock options
to directors. The 2013-14 proxies show that only 9.7 percent
of companies granted directors stock options, a significant
percentage drop from the 13 percent of companies that awarded
such options the previous year. The median value of the options
dropped as well, from $66,115 to $62,985.
Retainers when the director is a committee member
Audit
75th percentile
Comp
Nominating
$15,000
$10,000
$10,000
Median
10,000
$10,000
$7,750
25th percentile
$7,500
$7,500
$5,000
118
75
66
Cases
Restricted stock/RSUs continue to be a much more popular
means of rewarding directors. The percentage of Hay Group 300
companies issuing restricted stock/RSUs dropped slightly (from
74 percent to 70.3 percent), but the median value of the RSUs rose
significantly (from $125,000 to $140,000). Taken as a whole, the
data shows that 73.3 percent of the sample companies granted
directors some form of long-term incentive compensation (down
from 76 percent the previous year), while the median value of
these long-term incentive packages climbed from $135,000 to
$145,000.
Director compensation: Long-term incentives
RS/RSUs
Options
Total LT
75th percentile
$160,000
$100,000
$170,000
Median
$140,000
$62,985
$145,000
25th percentile
$120,000
$53,100
$125,000
211
29
220
Cases
Total direct compensation
To calculate the total direct compensation of a Hay Group 300
director, we calculated how many meetings each company’s
audit, compensation and nominating/governance committee
held during the 2013 fiscal year. For each company, we assumed
that every director attended 100 percent of the meetings of the
board, as well as all the meetings of the three board committees.
Finally, we had to make simple assumptions as to which
committees a typical director was a member or chairperson. The
following three scenarios were used to determine total direct
compensation of directors among the Hay Group 300:
1. Director is a chairperson of the audit committee and a
member of the nominating committee.
Director compensation: Total direct compensation
Scenarios
(1)
(3)
75th percentile
$290,000
$282,000
$271,250
Median
$265,000
$257,333
$248,000
25th percentile
$239,994
$230,000
$222,809
300
300
300
Cases
Compensation by revenue bracket
Not surprisingly, large companies with greater revenues often
have the resources to provide greater compensation to their
directors. We segmented our analysis to compare 2012 and 2013
data for companies in the following four revenue brackets:
2. Director is a chairperson of the compensation committee
and a member of the nominating committee.
Revenue under $10 billion
3. Director is a member of the audit committee and a member
of the compensation committee.
Revenue $20–$40 billion
In these three scenarios (1, 2 and 3 in the following table), the
median total direct compensation of a Hay Group 300 director
was 1) $265,000 (versus $255,673 last year), or 2) $257,333 (versus
$250,000 last year), and 3) $248,000 (versus $240,000 last year).
(2)
Revenue $10–$20 billion
Revenue above $40 billion
Deferred compensation and benefit programs
2013 median TDC scenarios
Scenarios
Revenues
(1)
(2)
(3)
Under $10B (33 cos.)
$253,000
$240,500
$227,500
$10–$20B (137 cos.)
$255,000
$242,000
$237,000
$20–$40B (63 cos.)
$265,000
$262,500
$250,000
Above $40B (67 cos.)
$280,000
$275,000
$260,000
Note the difference between the 2013 TDC using the defined
scenarios versus 2012 TDC using the same scenarios:
2012 median TDC scenarios
Scenarios
Revenues
(1)
(2)
(3)
Under $10B (67 cos.)
$235,000
$230,000
$225,000
$10–$20B (108 cos.)
$245,745
$240,000
$230,000
$20–$40B (63 cos.)
$250,000
$250,000
$235,000
Above $40B (67 cos.)
$280,000
$272,750
$260,000
Nearly all of the Hay Group 300 (96.3 percent versus 94 percent
the previous year) disclosed either some form of deferred
compensation or at least one type of director benefit. On the
other hand, only 67.3 percent of the companies disclosed at least
one type of director benefit arrangement, which represents
a slight decrease from the 69.3 percent that disclosed such
arrangements the previous year.
Most common types of deferred compensation or benefit
2011
2012
2013
Deferred compensation
60%
73%
72%
Matching gifts
43%
43%
44%
Spousal travel
16%
18%
18%
Continuing education
program
16%
18%
17%
Accident/death insurance
16%
15%
15%
Life insurance
12%
13%
12%
Use of company products
11%
13%
11%
8%
12%
10%
Use of company aircraft
Other, less common director benefits mentioned in the 2014
proxy filings include use of a company car, financial planning,
retirement arrangements, physical exams, disability coverage and
entertainment tickets.
Deferred compensation and benefits plans for directors
80%
70%
72%
60%
50%
44%
40%
30%
20%
10%
18% 17%
15%
12% 11% 10%
7%
6% 5%
3% 3%
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Did we see any major changes in director
pay in 2013?
In 2013, the median annual retainer rose to $100,000 for the
first time. Total long-term incentives jumped to a median of
$145,000. Grants of stock options to directors dropped from 13
percent of the sample last year to under 10 percent (9.7 percent)
in 2013. According to our Hay Group scenarios, median total
direct compensation for directors now falls between $248,000
and $265,000. Surveys indicate that the typical board member
sits on the board of three Fortune 500 companies (with four
memberships not uncommon). These findings suggest that
board members can collect in excess of $1 million annually for
board service at multiple companies. After factoring in the time
investment that a director makes to the company, versus the
CEO’s time investment, it is not surprising that a typical board
mainly consists of independent non-employee directors who are
getting paid for their services.
What do we see as the future for director pay?
We expect to see more companies continuing the current trend
toward eliminating board and committee meeting fees while
expanding their director compensation programs to include
an annual retainer, committee chair retainers (along with the
possibility of some retainers for committee members), plus longterm incentive grants in the form of restricted stock, restricted
stock units, unrestricted stock or deferred stock.
The evolution of the lead director position
Not long ago, only a few boards had a “Lead Director” position. In the last decade, more US
public companies have begun appointing lead (or presiding) directors of their boards. The
increased prevalence of lead directors at US public companies largely was a consequence of two
developments.
1. In the wake of corporate scandals (e.g., Enron and WorldCom), shareholders began pushing
in earnest for large US corporations to follow the lead of their European counterparts
in separating the positions of chairman and CEO. These shareholders rallied around the
idea that having an independent chairman could act as a safety check against misguided
management teams.
2. The need for an independent chairman or a lead director became a practical necessity when
the 2002 Sarbanes-Oxley Act (and associated rules issued by the Securities and Exchange
Commission and the stock exchanges) required the full board of directors at US public
companies to meet separately from management and non-independent directors.
Motivated by these two factors, most US public companies have either added a lead director
position or split the chairman and CEO responsibilities between two separate individuals.
Duties and responsibilities of a lead director
The lead director reports to and assists the board of directors,
especially the chairman of the board of directors. The lead
director works closely with the chairman and the remainder
of the board to ensure that the board of directors maintains
its proper organization, functions effectively and operates
independently from management. In addition to the usual duties
expected of all board members, the lead director has additional
responsibilities, including:
Working with the board to ensure that directors have
necessary decision-making resources
Consulting with the chairman and other board members
upon request on issues relating to corporate governance
Serving as a liaison between the chairman and the nonexecutive directors
Advising the chairman as to board meeting schedules,
assisting in setting agendas for these meetings and ensuring
sufficient time has been allotted to cover all agenda items
Working closely with committee chairs to coordinate
coverage of board responsibilities
Serving as the spokesperson for the company in the absence
of the chairman or the CEO
Reviewing and assessing director attendance, performance,
compensation, size and composition of the board and its
committees
Supporting effective shareholder communications.
Given these additional responsibilities, many companies pay their
lead directors an additional fee above and beyond standard board
member compensation. For the third year in a row, lead directors
who received supplemental compensation were awarded a
median fee of $25,000. While the fee has stayed the same, the
percentage of the Hay Group 300 that reported paying lead
directors an additional fee for their services has risen each year –
climbing from 51.3 percent of companies in 2011 to 59 percent in
2012 and then inching higher to 60.7 percent in 2013.
Chairing board meetings when the chairman is unavailable
to do so
Chairing meetings of independent directors to discuss
issues relating to company business without the presence of
management and the CEO
Lead director premium pay, 2013 (300 company sample)
Cash
High
Equity
Cash
Total
$250,000
$348,828
$358,828
75th percentile
$30,000
$40,000
$30,000
Median
$25,000
$25,000
$25,000
25th percentile
$20,000
$24,000
$20,000
$3,000
$20,000
$3,000
$32,741
$52,431
$36,082
174
17
182
Low
Average
Cases
Cash
High
Equity
Total
$100,000
$263,100
$263,100
75th percentile
$25,000
$51,000
$30,000
Median
$25,000
$35,000
$25,000
25th percentile
$15,000
$25,000
$20,000
$3,000
$20,000
$3,000
$26,389
$69,046
$30,340
171
13
177
Low
Average
Cases
Equity
Total
High
$90,000
$322,440
$322,440
75th percentile
$25,000
$40,000
$30,000
Median
$25,000
$27,500
$25,000
25th percentile
$15,000
$20,000
$20,000
$5,000
$10,000
$5,000
$25,419
$52,078
$28,045
148
12
154
Low
Average
Cases
This year’s summary statistics for lead director total premium pay
for 2013 compared to those for 2012 and for 2011 are quite similar.
While the median and the quartiles remained the same in the
past year, average premium pay did increase 18.9 percent from
$30,340 to $36,082. As more and more companies name lead
directors, they are continuing to increase the fees paid to lead
directors for assuming their additional responsibilities.
Director stock ownership guidelines and holding requirements
Historical background
Stock ownership guidelines for directors have been growing in prevalence since the early
1990s. As a result of adopting such programs for executives, companies became interested in
developing programs that encouraged longer term stock ownership for directors.
The development of stock ownership guidelines helped to ensure that directors held a certain
amount of company stock, and more importantly, maintained that ownership. While such
programs started in the larger companies, programs at smaller companies also have become
more prevalent.
The typical stock ownership guideline for directors requires that the director own and hold stock
equal to a specific multiple of annual retainer by a defined period of time (i.e., the “accumulation
period”). The next most popular approach is that the director must own a stated dollardenominated amount in shares by the end of the accumulation period.
Stock holding requirements started out as a way to require directors to retain stock acquired
upon a stock option exercise for a defined period of time after exercise. To motivate directors to
exercise their options and to hold the acquired shares, companies offered them an “exercise and
hold” incentive such as partial payment of resulting taxes or a tax gross-up. Soon thereafter, the
holding requirements were extended to other long-term incentives such as restricted stock and
restricted stock units.
By the year 2000, the majority of larger companies had ownership guidelines for directors and
holding requirements were becoming more common.
Director stock ownership guidelines
With respect to 2013, 83.3 percent of the Hay Group 300 (versus
75.3 percent in 2012) had director stock ownership guidelines.
These guidelines set a clear policy on stock ownership and
retention and often send a strong message to directors that they
must continue towards meeting their guideline level within a
stated “accumulation period.”
The majority of director stock ownership guidelines are based
on a multiple of annual retainer; 76.4 percent of the guidelines
for companies in the Hay Group 300 (versus 66.1 percent in 2012)
ranged from a multiple of one times annual retainer to as much
as 11 times annual retainer. The sample median was five times
annual retainer (the same as last year); this level was disclosed by
over half (62.8 percent) of the director guidelines, up from 55.3
percent in 2012. Note that the totals in our analyses may exceed
100 percent where companies use more than one approach.
CEO director stock ownership guidelines, multiple of annual retainer
7 times, 1.6%
Other, 2.1%
6 times, 2.1%
4 times, 10.5%
2 times, 1.0%
8 times, 1.0%
5 times, 62.8%
Of the director stock ownership guidelines, 12.4 percent are
stated as a dollar-denominated amount that ranges from $10,000
to $715,000, with a median of $400,000 (versus $325,000 in 2012).
Director stock ownership guidelines, dollar-denominated
$425,000, 6.5%
$500,000, 9.7%
Other, 45.2%
$150,000, 9.7%
$400,000, 12.9%
$300,000, 16.1%
Of the director stock ownership guidelines, 10.1 percent are
stated as a fixed number of shares that range from 500 shares
to a high of 26,000 shares, with a median of 10,000 shares (same
as last year). Fewer companies are reporting the guidelines as a
number of shares; the 10.1 percent in this year’s study compares
to 15.2 percent in 2012.
3 times, 18.8%
Director stock ownership guidelines, stated number of shares
12,000 shares, 8%
20,000 shares, 12%
Other, 32%
5,000 shares, 12%
15,000 shares, 16%
10,000 shares, 20%
Eight percent of the director stock ownership guidelines were
stated differently, such as:
A multiple of total compensation, rather than as a multiple of
annual retainer
Accumulation period
Stock ownership guidelines usually provide for an “accumulation
period,” which is a specified time period during which the director
is expected to accumulate the required shares. The most frequent
accumulation period remains five years (which is also the median).
In fact, companies disclosing five years as the accumulation
period rose from 72.6 percent in 2012 to 77.8 percent this year.
Typical language in a company’s proxy statement might state that
“directors are expected to meet their ownership requirements
within five years of becoming a director.”
Director stock ownership guidelines, accumulation period/time
to meet guideline
6 years, 1.6%
4 years, 4.9%
3 years, 13.5%
Other, 1.6%
2 years, .05%
5 years, 77.8%
The lesser of a multiple of annual retainer or a fixed number
of shares
The lesser of a fixed number of shares or a dollardenominated amount
A percentage of equity awarded or after-tax shares received.
The majority of the large companies have director stock
ownership guidelines, with most companies basing their
guidelines on a multiple of annual retainer. Most companies
disclose five times annual retainer as their stock ownership
guideline, a level that we don’t expect to change any time soon.
Pay incentives in stock
Stock retention and holding requirements
To help directors accumulate stock so that they can meet
their guidelines within the stated period of time, companies
established programs to encourage stock ownership. One way
of producing stock ownership for directors is to pay annual
retainers and/or other forms of annual compensation partially
in stock or better yet, restricted stock or restricted stock units
(RSUs). Restricted stock carries restrictions that bar the disposition
of the stock prior to the end of the restriction period. Another
alternative might be to provide the director with the opportunity
to elect to receive restricted stock in lieu of their annual retainer,
and if so, receive a premium restricted stock grant as well.
Companies rushed to put in stock ownership guidelines but
really didn’t consider how they would react if the guidelines were
not met. Soon thereafter, companies developed stock retention
programs that require retention of stock for a defined period of
time or until the guideline is met.
Since the 1990s, restricted stock as a long-term incentive vehicle
for directors has also been growing. The restrictions are often
one year, with such grants fitting nicely into a stock ownership
program and as a means to grow stock ownership.
Paying other long-term incentives in stock can work as well. There
are companies that pay all of their long-term incentives in stock
or pay 50 percent of their long-term incentives in stock or option
gains in stock.
Some approaches include paying 100 percent of long-term
incentives in stock until the guideline is met or paying one-half
of long-term incentives in stock that cannot be sold until the
director leaves the company.
Holding requirements can often be found in a stand-alone
agreement or as part of a stock ownership guideline. As part
of the ownership guideline, the language in the proxy might
read: “Following the exercise of options, a director subject to
the ownership guidelines who has not met his or her guideline
is expected to retain at least 50 percent of the net value of the
shares of stock received.”
Over one-fifth of the Hay Group 300 (21.3 percent versus 17.7
percent in 2012) now disclose some form of director stock holding
requirement. Where a holding period is used to enforce an
ownership guideline, it typically runs until the guideline is met.
The majority (65 percent) of the sample’s companies that disclose
a stand-alone holding requirement or a post-guideline holding
requirement have until retirement from the board as the holding
period; 10 percent have a one year holding period. A number of
the companies actually require that the holding period extend
beyond retirement by six months to one year.
Which shares count towards
the ownership guideline?
Companies often include the following types of shares towards
meeting their director stock ownership guidelines:
Shares held directly or beneficially owned by the director
Deferred compensation share holdings
Vested restricted stock and restricted stock units (RSUs).
Companies disclosed that they include the following share types
in their definition of covered shares:
Restricted stock or RSUs: 23.6 percent
Stock options: 0.4 percent (only nine companies)
Shares held or beneficially owned: 29.6 percent
Deferred compensation plan shares: 15.6 percent.
Most companies do not count the following types of shares
towards meeting their stock ownership guidelines:
Unexercised stock options, vested stock options, unvested
stock options
Unvested restricted stock and RSUs.
Since some companies do include the above share types in
meeting the ownership guidelines, it is important to study each
company’s proxy disclosure to determine which shares are
counted as disclosed by the company.
Monitoring compliance
Directors who are subject to a stock ownership guideline must
show progress towards meeting the guideline. Often, companies
disclose that they monitor compliance on an annual basis. If the
guideline is not met during the accumulation period or if annual
progress is not met, then penalties can be triggered.
Of the companies in the sample, 24.4 percent disclosed that they
monitor compliance regularly or on an annual basis.
Non-CEO chairman compensation: Executive and non-executive positions
The chairman position
The chairman of the board is typically responsible for management of the activities of the board
of directors. Among other responsibilities, this individual sets board agendas, oversees director
evaluations and appointments, chairs board meetings and the annual shareholders’ meeting, and
provides advice and counsel to the chief executive officer (CEO).
Until recently, the vast majority of US public corporations had a chairman who was also the
CEO of the organization. As an executive officer of the company, the chairman/CEO fulfills
the responsibilities of managing the board as well as the CEO’s responsibilities of managing
the business of the company. In recent years, governance watch-dogs and some institutional
shareholders have questioned whether these dual responsibilities should be lodged in one
individual. They have proposed a split between the chairman and CEO positions to provide a
check and balance on the CEO and his management team.
The Sarbanes-Oxley Act (followed by new rules and listing standards issued by the Securities and
Exchange Commission and the stock exchanges) required that directors of a US public company
meet not only as members of the full board but also separately from management and nonindependent directors. Since then, most companies have either added a lead director position or
split the chairman and CEO responsibilities between two individuals.
Among our Hay Group 300 sample, most companies in 2013 still maintained a governance
structure led by a CEO with a chairman’s responsibilities, but the prevalence has continued to
fall. Boards with CEOs as chairmen constituted less than 60 percent (58.3 percent) of the sample,
down from 62.7 percent in 2011.
Chairman positions, 2013 versus 2011
2013
Non-CEO executive
chairman, 13%
Chairman and
CEO 58.3%
Thirteen percent of the companies have a non-CEO executive
chairman (versus 10.7 percent in 2011), and 29.0 percent of the
companies have a non-executive chairman (versus 26.3 percent
in 2011) who is not an employee of the company. (Note the totals
may exceed 100 percent as some companies use more than one
approach.) The prevalence of executive chairmen is up over 20
percent between 2011 and 2013; the prevalence of non-executive
chairmen is also up over 10 percent.
Executive chairman compensation
Among the 39 companies in the Hay Group 300 with an executive
chairman, the 2013 total annual compensation (“TAC”, or salary
plus annual incentive) of the executive chairman ranged from a
low of $250,000 to a high of $11.8 million, with a median of $1.98
million.
Non-executive
chairman, 29%
2011
No chairman, 0.3%
Non-CEO executive
chairman, 10.7%
Non-executive
chairman, 26.3%
Chairman and
CEO, 62.7%
By comparison, the TAC of executive chairs in 2011 ranged from a
low of $220,000 to a high of $13.5 million, with a median of $3.4
million. The chair’s TAC as a percent of the CEO’s TAC at these 39
organizations in 2013 ranged from a low of 2.8 percent to a high
of 341.8 percent, with a median of 68.4 percent. In 2011, the chair’s
TAC as a percent of the CEO’s TAC ranged from a low of 13.7
percent to a high of 199.6 percent, with a median of 95.7 percent.
The 2013 total direct compensation (“TDC”, or TAC plus longterm incentives) of the executive chairman ranged from a low of
$400,000 to a high of $17.3 million, with a median of $5,045,897, as
compared to their 2011 TDC which ranged from a low of $220,000
to a high of $20.3 million, with a median of $6,586,068. The chair’s
TDC as a percent of the CEO’s TDC at these 39 organizations
ranged from a low of 1.4 percent to a high of 165.7 percent, with
a median of 55.3 percent. In 2011, the chair’s TDC as a percent of
the CEO’s TDC ranged from a low of 1.3 percent to a high of 273.3
percent, with a median of 83.6 percent.
Chair TDC as percent of CEO TDC, 2011–2013
2013
Chair TDC
Chair TDC as %
of CEO TDC
CEO TDC
High
$17,261,775
$65,358,418
165.7%
The sample change in the 300 companies between 2011 and 2013
could explain the differences in the compensation received by
the executive chairman and the CEO during 2011 and 2013.
75th percentile
$7,304,395
$15,671,674
83.5%
Median
$5,045,897
$9,671,674
55.3%
25th percentile
$3,142,332
$7,069,095
20.6%
Chair TAC as percent of CEO TAC, 2011–2013
Low
$400,000
$1
1.4%
$5,623,532
$13,442,679
59.3%
2013
Chair TAC
Chair TAC as %
of CEO TAC
CEO TAC
Mean
Chair TDC as %
of CEO TDC
High
$11,756,731
$20,400,000
341.8%
2011
75th percentile
$3,732,500
$4,407,375
94.9%
High
$20,256,016
$69,316,778
273.3%
Median
$1,981,354
$3,478,846
68.4%
75th percentile
$10,025,025
$17,149,135
117.4%
25th percentile
$901,600
$2,035,089
46.9%
Median
$6,586,068
$9,332,059
83.6%
Low
$250,000
$1
2.8%
25th percentile
$3,668,430
$5,467,790
34.0%
$2,982,084
$4,819,710
77.2%
$220,000
$2,100,038
1.3%
$8,196,044
$14,006,864
86.9%
Mean
2011
High
Chair TAC
CEO TAC
Chair TAC as %
of CEO TAC
$13,500,000
$33,500,000
199.6%
75th percentile
$4,268,300
$4,604,581
134.6%
Median
$3,360,000
$3,729,627
95.7%
25th percentile
$1,100,000
$2,124,648
50.0%
$220,000
$467,307
13.7%
$3,723,148
$5,514,334
94.5%
Low
Mean
Low
Mean
Chair TDC
CEO TDC
The data indicates that non-CEO executive chairmen of the 300
largest companies are paid:
Annual compensation that has not kept pace with what the
current CEO is paid, creating a larger pay gap between the
executive chairman’s pay and the CEO’s pay, and
Long-term incentive compensation that is significantly less
than the current CEO receives, creating a larger pay gap
between the executive chairman’s TDC and the CEO’s TDC.
This makes some sense as many of the executive chairmen
are founders, members of the founding family of the
company or a prior CEO of the company; thus the individual
already has a large stock ownership in company stock.
Executive chairman is often a founder of the company
or a prior CEO
The non-CEO executive chairman is often one of the following:
A founder of the company
Non-executive chairman compensation
Eighty-seven (29.0 percent) of the Hay Group 300 companies
(versus 79 companies or 26.3 percent in 2011) have a nonexecutive chairman. In all cases, the compensation of the nonexecutive chairman was disclosed in the company’s most recent
proxy statement.
The 2013 annual retainer of the non-executive chairman ranged
from a low of $0 to a high of $1.45 million, with a median of
$265,000; the 2011 annual retainer of the non-executive chairman
ranged from a low of $0 to a high of $2.2 million, with a median
of $230,000. The chair’s 2013 annual retainer as a percent of the
CEO’s 2013 annual salary at these 87 organizations had a low of
zero percent and a high of 453.1 percent, with a median of 25.6
percent; the chair’s 2011 annual retainer as a percent of the CEO’s
2011 annual salary at these 79 organizations extended from a low
of zero percent to a high of 69.7 percent, with a median of 21.9
percent. Note that the medians have risen between 2011 and 2013.
A member of the family of the founder of the company
A recent CEO of the company who relinquished theCEO
position to serve as chairman and then as executive chairman.
Forty-four percent (17 of the companies) of the 39 executive
chairmen are either founders of the company or a member of the
founder’s family.
Seventy-three percent (16 of the companies) of the remaining 22
companies have an executive chairman who was a prior CEO of
the company.
Chair annual retainer as percent of CEO salary, 2011–2013
2013
Chair annual
retainer
High
$1,448,000
CEO salary
$2,268,231
Chair annual
retainer as % of
CEO salary
Chair annual retainer as multiple of board member
retainer, 2011–2013
453.1%
Board member
annual retainer
Chair annual
retainer as
multiple of
board member
retainer
Chair annual
retainer
$1,448,000
$300,000
9.5
75th percentile
$382,500
$1,299,888
36.6%
2013
Median
$265,000
$1,116,878
25.6%
High
25th percentile
$170,000
$922,115
15.5%
75th percentile
$382,500
$177,500
3.2
$0
$1
0.0%
Median
$265,000
$100,000
2.1
$300,406
$1,084,117
35.7%
25th percentile
$170,000
$80,000
1.7
$0
$30,000
0.0
$300,406
$123,728
2.8
Low
Mean
Low
Chair annual
retainer as % of
CEO salary
Mean
2011
Chair annual
retainer
High
$2,187,087
$10,432,692
69.7%
75th percentile
$360,000
$1,129,375
32.5%
Median
$230,000
$1,000,000
21.9%
2011
Chair annual
retainer
25th percentile
$140,000
$885,678
14.1%
High
$2,187,087
$275,000
8.2
$0
$1
0.0%
75th percentile
$360,000
$131,250
3.5
276,405
$1,115,559
23.9%
Median
$230,000
$80,000
2.3
25th percentile
$140,000
$65,000
1.6
$0
$30,000
0.0
$276,405
$104,524
2.8
Low
Mean
CEO salary
Low
The chair’s 2013 annual retainer as a multiple of the typical board
member’s 2013 annual retainer ranged from a low of zero to 9.5
times, with a median of 2.1 times; the chair’s 2011 annual retainer
as a multiple of the typical board member’s 2011 annual retainer
ranged from a low of zero to 8.2 times, with a median of 2.3
times. Note that the median went down between 2011 and 2013.
Mean
Board member
annual retainer
Chair annual
retainer as
multiple of
board member
retainer
The 2013 total direct compensation of the non- executive chairman
ranged from a low of $0 to a high of $1.6 million, with a median of
$401,500; the 2011 TDC of the non-executive chairman varied from
a low of $0 to a high of $2.2 million, with a median of $410,000.
The chair’s 2013 TDC as a percent of the CEO’s 2013 TDC at these
87 organizations extended from a low of zero percent to a high of
24.3 percent, with a median of 4.2 percent; the chair’s 2011 TDC as a
percent of the CEO’s 2011 TDC at these 79 organizations ranged from
a low of zero percent to a high of 44.2 percent, with a median of 5.5
percent. Note that the median dropped between 2011 and 2013, with
the decrease likely due to the dramatic jump in the CEO’s TDC over
the same time period.
Chair TDC as percent of CEO TDC, 2011–2013
2013
High
Chair TDC
Chair TDC as a multiple of board member TDC, 2011–2013
2013
High
Chair TDC as %
of CEO TDC
CEO TDC
The chair’s 2013 TDC as a multiple of the typical board director’s
2013 TDC ranged from a low of zero to a high of 5.9 times, with
a median of 1.6 times; the chair’s 2011 TDC as a multiple of the
typical board director’s 2011 TDC ranged from a low of zero to
a high of 7.5 times, with a median of 1.6 times. Note that the
median remained the same between 2011 and 2013, while the
average went down.
$1,600,073
$425,000
5.9
75th percentile
$487,469
$294,000
1.8
Median
$401,500
$260,000
1.6
25th percentile
$325,002
$236,000
1.3
$0
$76,400
0.0
$435,119
$265,502
1.6
$1,600,073
$23,445,239
24.3%
75th percentile
$487,469
$12,977,891
5.7%
Low
Median
$401,500
$10,354,782
4.2%
Mean
25th percentile
$325,002
$6,453,813
3.3%
$0
$810,606
0.0%
$435,119
$10,586,806
6.6%
Low
Mean
2011
High
Chair TDC
Chair TDC as %
of CEO TDC
CEO TDC
Board member
TDC
Chair TDC
Chair TDC as
multiple of
board member
TDC
2011
High
Chair TDC
Chair TDC as
multiple of
Board memberT board member
DC
TDC
$2,205,087
$350,000
7.5
75th percentile
$505,446
$269,000
2.0
$2,205,087
$53,268,230
44.2%
75th percentile
$505,446
$11,886,159
7.6%
Median
$410,000
$240,000
1.6
Median
$410,000
$7,998,869
5.5%
25th percentile
$293,474
$215,000
1.3
25th percentile
$293,474
$5,322,400
3.6%
Low
$0
$63,500
0.0
$0
$1
0.0%
Mean
$459,253
$239,201
1.9
$459,253
$9,269,517
6.6%
Low
Mean
How does the compensation of a nonexecutive chairman compare to that of an
executive chairman?
As one would expect, the non-CEO executive chairman, who
is an employee of the company, gets paid many times the
compensation of the non-executive chairman who is not an
employee of the company. The statistics also show that the
executive chairman is paid much more than the non-executive
chairman. The chairman’s TDC as a percentage of the CEO’s TDC is
a median of 55.3 percent for the executive chairman and only 4.2
percent for the non-executive chairman.
The non-CEO chairman’s future
With all of the interest in the US on splitting the chairman and
CEO positions, it is very likely that more companies will split the
two positions in 2015 and going forward.
Executive Chair TDC and Non-Executive Chair TDC
as percent of CEO TDC
2013
Execitive
chair TDC
Nonexecitive
chair TDC
Executive
chair TDC
as % of CEO
TDC
Nonexecutive
chair TDC
as % of CEO
TDC
High
$17,261,775
$1,600,073
165.7%
24.3%
75th percentile
$7,304,395
$487,469
83.5%
5.7%
Median
$5,045,897
$401,500
55.3%
4.2%
25th percentile
$3,142,332
$325,002
20.6%
3.3%
$400,000
$0
1.4%
0.0%
$5,623,532
$435,119
59.3%
6.6%
Low
Mean
An experienced partner: Your Hay Group team
Irv Becker
US leader, board solutions
215.861.2495
[email protected]
Bill Gerek
Regulatory expertise leader
Board solutions – US
312.228.1814
[email protected]
Steve Sabow
Director of research
Board solutions – US
201.557.8409
[email protected]
Jim Otto
Southeast regional leader
Board solutions – Atlanta
404.575.8740
[email protected]
Brian Tobin
Midwest regional leader
Board solutions – Chicago
312.228.1847
[email protected]
Cory Morrow
Southwest regional leader
Board solutions – Dallas
469.232.3826
[email protected]
Brian Holmen
West coast regional leader
Board solutions – Los Angeles
949.251.5440
[email protected]
Greg Kopp
Northeast/Mid-Atlantic
regional leader
Board solutions – NY Metro/
DC Metro
703.841.3118
[email protected]
Tim Bartlett
Board solutions – Kansas City
816.329.4956
[email protected]
Dan Moynihan
Board solutions – NY Metro
201.557.8423
[email protected]
Marty Somelofske
201.557.8405
[email protected]
Dave Wise
201.557.8406
[email protected]
Christine Rivers
Board solutions – Boston
617.425.4545
[email protected]
Matt Kleger
Board solutions – Philadelphia
215.861.2341
[email protected]
Dana Martin
Board solutions – Chicago
312.228.1824
[email protected]
Brandon Cherry
Board solutions – San Francisco
415.644.3737
Brandon.Cherry@haygroupcom

Executive and director compensation

Transcription

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