NEW YORK, April 16, 2013 — Growth in compensation for chief executive officers (CEOs) at the nation's largest corporations slowed considerably in 2012, reflecting weakening company financial performance last year, according to a new analysis of proxies by global professional services company Towers Watson (NYSE, NASDAQ: TW).
The Towers Watson analysis found that total pay for CEOs increased just 1.2% in 2012, down from the 6.7% median increase CEOs received in 2011. Total pay, as reported in the Summary Compensation Table in company proxy statements, includes base salary, actual annual and long-term cash bonuses, and the grant-date value of long-term incentives including stock options, restricted stock and long-term performance shares. The smaller increase in total pay was driven largely by a steep decline in annual bonuses. While salary increases declined slightly last year — from 3.0% in 2011 to 2.8% in 2012 — annual bonuses paid to CEOs dropped by 16% at the median, compared to 2011, when bonuses were relatively flat. Target long-term incentives, the largest component of executive pay in major companies, were up 5.6% at the median in 2012.
The analysis, based on 270 S&P 1500 companies that filed proxies disclosing 2012 pay by late March, also revealed that the percentage of CEOs who received bonuses that were at or below target levels increased from 47% in 2011 to 58% last year. This can be mostly attributed to a significant slowdown in sales and earnings that companies experienced in 2012.
"The fact that many CEOs saw their bonuses take a significant hit and Summary Compensation Table pay was relatively flat suggests the companies and their boards took a conservative approach to pay in 2012," said Todd Lippincott, leader of Executive Compensation consulting at Towers Watson for the Americas.
One of the most noteworthy shifts in executive compensation is the continuing growth in performance-based long-term incentive plans. Almost half (44%) of S&P 1500 companies now have long-term performance plans in place, according to the Towers Watson analysis. Total return to shareholders is now the most prevalent performance metric that companies use to base long-term incentive plan awards. More than four in 10 companies (41%) now use this measure, compared with just 18% that used this metric in 2008. Earnings per share, historically the most prevalent measure, is now used by 40% of companies.
Strong shareholder support for say on pay in its third year
The analysis also found that in the third year for mandatory say-on-pay votes, 160 of the Russell 3000 companies that have disclosed their shareholder voting results so far reported average support of 90% of the votes cast this year. This is consistent with last year's voting results. Only three companies in this sample failed to win majority support for their say-on-pay resolution so far this year.
"While the say-on-pay experience has been positive for most companies, we continue to see a small number of cases in which shareholders use the vote to send companies a message about pay and performance," Lippincott said. "Our research shows that companies with poor shareholder returns were five times as likely as other companies to receive low say-on-pay support, while those with high CEO pay opportunities were eight times as likely."
Other findings from the Towers Watson proxy analysis include:
- One in four (26%) companies provided supplemental charts describing the relationship between pay and performance in their 2013 proxies. That's an increase from 17% in 2012 and 9% in 2011.
- More companies are disclosing alternative measures of pay in their proxy statements. Of those that included a pay-for-performance summary, almost three-quarters use a definition other than Summary Compensation Table pay in their analyses.
About Towers Watson
Towers Watson (NYSE, NASDAQ: TW) is a leading global professional services company that helps organizations improve performance through effective people, risk and financial management. The company offers solutions in the areas of benefits, talent management, rewards, and risk and capital management. Towers Watson has 14,000 associates around the world and is located on the web at towerswatson.com.