equilar 2013 ceo pay stategies report

8/13/2019 Equilar 2013 Ceo Pay Stategies Report

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CEO Pay StrategiesCompensation at S&P 500 Companies

2013


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Copyright 2013 Equilar, Inc. All rights r eserved

2013 CEO PAY STRATEGIESCompensation at S&P 500 Companies

Introduction 3

Executive Summary 4

Key Findings 5

Report Scope 6

Compensation Trends 8

Total Compensation Rises 9

Bonuses Decline 10

Performance Shares Continue to Rise 11

Decreasing Presence of Options in 2012 Compensation 12

Equity Award Design 13

Pay By Industry 14

Internal Pay Equity 17

Gender 20

2013 Equilar, Inc. The material in this publication may not be reproduced or distributed in whole or in part without the written consent of Equilar, Inc. This report provides information of general i nterest in an abridged manner and is not intended as a substitute for accounting, tax, investment, legal or other professional advice or services. Readers should consult with the appropriate professi onal(s) before acting on information contained in this publication. All disclosure examples in this reportare reformatted to fit this document, and certain sections of sample texts may be bolded to add emphasis. If you have questions or comments regarding this publication,

please email [email protected]


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2 0 1 3 C EO P A Y STRATEGIES: COMPENSATION A T S& P 5 0 0


Introduction


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Executive Summary

Several years have passed since the most widespread near-economic collapse in generations. Thestock markets have recovered to reach new highs while other areas like housing and employmentlevels are making slow but steady progress. Companies are finding solid ground after experiencing

large market upheavals and sweeping legislative and regulatory changes that required companies toadjust and change with little preparation time. Due to this increased level of stability, the impact ofthe changes and subsequent responses from companies can now be viewed in a more definitivelight.

In its third year of mandatory implementation, Say on Pay has not produced the widespreadindictment on pay that many thought it would, but it certainly has made an impact. Say on Payresults have remained consistent the last three years with most companies receiving at least 90percent approval with only two to three percent failing. This strong support for the majority of payplans, coupled with increased engagement between companies and shareholders has led to alteredpay designs as well as new governance policies meant to improve accountability for shareholders,

and alignment of pay for management.

Interestingly, pay levels continue to go up for top executives. The change is not as dramatic as itwas several years ago but CEO compensation is growing at levels last seen prior to the recession.This increase can mostly be attributed to the growing stock prices of companies, leading to highergrant-date values on awards year-over-year. What the executives eventually receive will bedetermined by stock price and financial performance of their companies several years from now.

Pay plan changes have led to greater reliance on equity to deliver value to the executive.Specifically, through the use of stronger performance metrics linked to the payout of the award. Thetrends in this years CEO Pay Strategies study are a continuation of findings from past years

reports, reinforcing the idea that companies are still moving toward equity with the use of moreperformance shares and less options. The move away from cash and toward greater ownership ofthe company is helping to incentivize executives to seek long-term returns for shareholders. But ifthe current trends continue executives, along with investors, can expect to realize strong returns.

This report is intended to provide a broad-based analysis of S&P 500 CEO compensation strategiesduring the past year. It also provides insight into the differences among various industries, and areview of the characteristics of CEO compensation by gender.


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Key Findings

Total Compensation Rises

In 2012, median total compensation for S&P 500 CEOs was approximately $9.7 million, up fromapproximately $9.0 million in 2011, an increase of 6.5 percent.

Bonuses Decline

Median total bonus payouts for S&P 500 CEOs decreased by 5.4 percent, from the 2011 medianof $2 million to the 2012 median of $1.9 million. Although the amount of aggregate bonuspayouts declined, the prevalence of annual bonus payouts increased from 82.7 percent in 2011to 83 percent in 2012.

Accountability for Performance

Performance share usage is still on an upward trend. Three-quarters of the CEOs at S&P 500

companies received some form of performance-based equity, an increase in 2012 of almost 8percent from the previous year.

Options Decrease as a Compensation Element

Option grants declined in 2012 pay packages. The number of CEOs receiving option grantsdecreased from 68.4 percent in 2011 to 60.7 percent in 2012. With this decline, we see areduction of option value as a part of total compensation, although total equity value wasapproximately 62 percent of compensation in both 2011 and 2012.

Change in Median Compensation by Industry

The Healthcare industry had the highest median CEO total compensation in 2012, with a value of$11.1 million. The Industrial Goods industry had the greatest percentage increase from 2011 to2012, with median CEO total compensation rising 22.8 percent.


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Report Scope


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Equilars analysis of S&P 500 CEO compensation is based on recently filed proxy data for 323 chiefexecutives at 321 companies in the S&P 500. The companies studied have had the same CEOs inplace for at least two full years. By selecting only incumbent CEOs, the study avoids distortion fromnew-hire awards, and more accurately tracks year-over-year changes in compensation. Thecompanies included in this report filed their most recent proxy between January 1, and April 30,

2013. The key financial characteristics of this group are described in the sections below.

Revenue

Median revenue for the 321 companies inthe study increased by 7.6 percent from2011 to 2012. The median revenue in2012 was $8.1 billion, compared to $7.5billion in 2011. Average revenue grew by4.5 percent over the same period.

Net Income

S&P 500 net income increased for theyear, climbing to a median of $677million in 2012, an increase in median netincome of 6.1 percent from 2011.

Market Capitalization

In 2012, S&P 500 companies saw a 14

percent increase in median marketcapitalization, from a median of $11.5billion in 2011 to a median of $13.1billion in 2012.

$7.5$8.1

$0.0

$2.0

$4.0

$6.0

$8.0

$10.0

2011 2012

S&P 500 Median Revenue ($BB)

$638 $677

$0.0

$200.0

$400.0

$600.0

$800.0

2011 2012

S&P 500 Median Net Income ($MM)

$11.5 $13.1

$0.0

$4.0

$8.0

$12.0

$16.0

2011 2012

S&P 500 Median Market Cap ($BB)


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Compensation Trends


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Total Compensation Rises

Median total compensation for S&P 500 CEOs increased from $9.0 million in 2011 to 9.7 million in2012, an increase of 6.5 percent. For this analysis, total compensation includes base salary, annualand long-term cash bonus payouts, the grant date value of stock and option awards made during

the year, and other compensation including nonqualified earnings on deferred compensation and allother compensation.

For fiscal 2012, base salary, stock and other compensation all increased in median value ascompared to 2011. Stock awards experienced a 17.2 percent increase, the greatest change of the fivecomponents, while median base salary increased 4.4 percent. The largest percentage drop belongedto option awards, which decreased in median value by 16 percent in 2012. Bonuses alsoexperienced a drop in median value from $2.0 million in 2011 to $1.9 million in 2012.

The chart below shows the change in median value for each major compensation component from2011 to 2012.

4.4%

-5.4%

17.2%

-16.0%

9.4%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

Salary Bonus Stock Options Other

Change in Median Compensationfrom 2011 to 2012 for S&P 500 CEOs


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Bonuses Decline

Aggregate bonus payouts, which consist of annual bonuses (STI Bonus), long-term bonuses (LTIBonus) and discretionary bonuses, fell from a median of $2.0 million in 2011 to a median of $1.9million in 2012, a 5.4 percent decrease. The percentage of CEOs who received a bonus payout also

declined slightly, from 93.2 percent in 2011 to 92.6 percent in 2012.

The largest share of aggregate bonus payouts was annual bonuses, which increased in prevalencefrom 82.7 percent to 83 percent of CEOs receiving a payout. However, the median value of annualbonuses decreased marginally from $1.56 million in 2011 to $1.55 million in 2012.

Long-term cash bonuses fell in prevalence, with only 9 percent of CEOs receiving a multi-yearpayout in 2012, compared to 11.5 percent in 2011. Payouts of discretionary bonuses decreased aswell, from 17 percent in 2011 to 14.6 percent in 2012.

The following chart shows the prevalence of CEOs receiving annual or short-term incentive planbonuses, long-term incentive plan bonuses, and discretionary bonuses in 2011 and 2012.

82.7%

11.5% 17.0%

83.0%

9.0% 14.6%0.0%

25.0%

50.0%

75.0%

100.0%

STI Bonus LTI Bonus Discretionary

Prevalence of Bonus Payouts for S&P 500 CEOs

2011

2012


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Performance Shares Continue to Rise

Following the trends of the last few years, performance share grants continued to grow in 2012.Three-quarters of executives received at least one grant of performance shares, up from 68.2percent in the previous year. However, with this rise in performance shares, an almost equal decline

was seen in option grants, with 11 percent fewer executives receiving an option grant based onservice conditions alone. Restricted stock grants were practically unchanged from previous years,but did show a slight decrease from 2011 to 2012.

The chart below illustrates the percentage of CEOs in the S&P 500 who received at least one grant ofthe following equity vehicles in both of the last two fiscal years.

51.7%68.4% 68.4%

50.8%60.7%

76.2%

0.0%

25.0%

50.0%

75.0%

100.0%

Stock Options Performance Shares

Equity Vehicle Prevalence

2011

2012


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Decreasing Presence of Options in 2012 Compensation

Pay design remained fairly stable between 2011 and 2012 with equity comprising the majority of thevalue of total compensation. Although equity has accounted for approximately 62 percent of totalpay in both of the most recent fiscal years, the role that option grants play has decreased. Option

value as a percentage of total compensation has decreased by approximately 3 percent from lastyear with stock making up the largest difference in this value. This may be explained by the increasein performance share awards, most often granted as stock or units.

The following charts represent the average percentage of total compensation that each element ofpay represents.

10.1% 10.4%

24.7% 23.8%

41.7% 44.3%

20.3% 17.6%

0%

25%

50%

75%

100%

2011 2012

S&P 500 CEO Pay Mix

Other

Options

Stock

Bonus

Base Salary


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Equity Award Design

In both of the last two fiscal years, the combination of granting options and performance shares hasremained the most popular equity design. The most significant growth in equity mix was seen ingranting both restricted and performance-based shares, a method used by twice as many

companies as last year. Following the general trend of a reduction in option awards, all equity mixesinvolving options declined from last year, with the exception of the combination of options andperformance shares.

With performance shares increasing in popularity, more companies have switched to grantingperformance shares as their only method of equity compensation, this mix accounts for 44companies this year as opposed to 33 in 2011. Overall, equity is an important factor incompensation, with approximately 3 percent of companies not granting any form of equity to theirexecutives.

The following chart shows the number of S&P 500 CEOs who received the specified equity mixes.

1724

16

3345

82

36

70

1118 15

4433

86

57 59

0

25

50

75

100

No Equity Options (O)Only

RestrictedStock (RS)

Only

PerformanceShares (PS)

Only

(O) & (RS) (O) & (PS) (RS) & (PS) (O) & (RS) &(PS)

Prevalence of Equity Compensation Design for S&P 500 CEOs

2011 2012


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Pay By Industry


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Executive pay levels differed by industry in 2012. Healthcare companies paid their CEOs a mediantotal compensation of $11.1 million, ranking them first for the industries examined for the secondconsecutive year. Chief executives in the Industrial Goods industry were not far behind, with amedian total compensation of $11 million. Compared to 2011, in 2012 the Industrial Goods industryalso saw a 22.8 percent increase in median compensation. While most industries experienced an

increase in pay in 2012, the Basic Materials industry saw its median CEO total compensation fall by1.5 percent. Also, although the Utilities industry had the lowest median total compensation ($7.5million) in 2012, this value was 9.8 percent higher than the 2011 median.

The chart below shows median CEO total compensation for each designated industry.

The next chart shows the change in median CEO total compensation from 2011 to 2012 for eachsector.

$9.7

$7.5

$9.2

$10.9

$11.0

$11.1$9.8

$9.5

$9.3

$0.0 $2.0 $4.0 $6.0 $8.0 $10.0 $12.0

All Companies

Utilities

Technology

Services

Industrial Goods

HealthcareFinancial

Consumer Goods

Basic Materials

2012 Median CEO Total Compensation ($MM)

-1.5%

3.5%

9.3%5.6%

22.8%

13.5%

3.1%

9.8%6.5%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Change in Median CEO Total Compensation from 2011 to 2012

Basic Materials

Consumer Goods

Financial

HealthcareIndustrial Goods

Services

Technology

Utilities

All Companies


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The following chart shows the percentage of total pay in each industry broken down by total cashcompensation (salary and bonus), total equity compensation (stock and option awards), and othercompensation (benefits, perquisites, and nonqualified earnings on deferred compensation).

32.4%

28.5%

35.2%

41.6%

31.5%

35.0%

36.8%

31.8%

34.3%

65.1%

68.5%

59.7%

51.6%

66.4%

62.7%

60.5%

63.3%

61.9%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Utilities

Technology

ServicesIndustrial Goods

Healthcare

Financial

Consumer Goods

Basic Materials

All Companies

Average S&P 500 CEO Pay Mix by Sector for 2012

Total Cash Total Equity All Other


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Internal Pay Equity


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A chief executive officers pay at a company usually helps to determine the pay given to the otherexecutives at his or her firm. In recent years, more companies have been sensitive to how theirCEOs pay fares in comparison to that of other Named Executive Officers (NEOs). In 2012, themedian CEO pay was 2.3 times more than the second-highest paid executive. The pay multipleincreases to 3.0 and 3.6 for the third- and fourth-highest paid NEOs. The portion of a CEOs

compensation that had the largest multiple over the other NEOs was equity, with CEOs receiving amedian of 2.6 times the equity of the second-highest paid executive.

The chart below shows the median pay levels of each NEO and the breakdown of the componentsthat make up their total compensation.

$0.0

$1.0

$2.0

$3.0

$4.0

$5.0

$6.0

$7.0

$8.0

$9.0

$10.0

CEO 2 3 4 5

Median S&P 500 NEO Pay Levels ($MM)

All Other

Equity

Bonus

Base Salary


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The pay multiple between the CEO and the second-highest paid executive may increase or decreasedepending on the industry in which the executive works. Utility and Industrial Goods had the largestCEO to second-highest paid NEO pay multiples of 3.0 and 2.9, respectively, followed by ConsumerGoods and Basic Materials with a 2.7 multiple. The industries with the lowest pay multiple wereFinancial Services and Services, where the CEO received approximately 2.2 times the compensation

of the second-highest paid NEO.

The chart below shows the multiple of the median CEO pay and the median of the second-highestpaid executive.

"#$ "#$

"#" "#%

"#&

"#" "#%

%#'

"#%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

BasicMaterials

ConsumerGoods

FinancialServices

Healthcare IndustrialGoods

Services Technology Utilities AllCompanies

CEO to #2 Multiple by Industry


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Gender


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An increasing number of females are becoming C-Suite level executives at large companies.However, the commonly discussed subject of pay discrepancies between female employees andtheir male counterparts often implies that women receive less compensation than men.Subsequently, we analyzed the female and male CEO pay from the large companies we observed.

There were only nine female Chief Executive Officers in this years study. The number of femaleCEOs was small, but their characteristics remained similar to those of male CEOs. Female CEOsreceived 16.3 percent more in median pay in 2012, as compared to male CEOs. Due to the smallsample size of females in this study, no conclusions could be drawn from the data. The table belowshows a summary of certain characteristics from CEOs of both genders.

CEO Characteristics by Gender

Female(n=9)

Male(n=314)

Median Pay $11,166,819 $9,605,432

Tenure 6.0 7.0

Most Prevalent Industry(% of CEOs)

Consumer Goods,Technology(Both 33%)

Financial(21%)


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How CEOs of both genders receive their compensation is also interesting. In 2012, female CEOsreceived approximately 31 percent of their compensation in cash and 68 percent in equity. MaleCEOs, on the other hand, received about 34 percent of their total compensation in cash and 62percent in equity. While the numbers show that female CEOs receive less cash and more equity thanmale CEOs, these results may be influenced by other factors, such as the industries where female

CEOs are more prevalent.

34%

31%

62%

68%

0% 25% 50% 75% 100%

Male

Female

Average S&P 500 CEO Pay Mix by Gender

Avg Cash Avg Equity Avg Other


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Lastly, we compared the pay multiple to NEOs of each gender. Female CEOs had a 2.5 multiple overthe next highest paid executive at their companies, and male CEOs had a 2.2 multiple. Once again, itis worth noting that this particular observation may not be strong statistically because of the smallnumber of female CEOs in the study.

For more information, please contact Aaron Boyd at [email protected] . Aaron Boyd is

the Director of Governance Research at Equilar. The contributing authors of this paper

are Hardeep Dhillon, Senior Research Analyst, Shelby Dempsey and Chelsea Park,

Research Analysts.

2.52.2

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Female Male

CEO to #2 Pay Multiple by Gender


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equilar 2013 ceo pay stategies report

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