A detailed Towers Watson examination of proxies filed by large corporations indicates that executive compensation has not been immune from the shocks to company performance brought on by the financial crisis and the recession. The results were discussed in a webcast in April 2009.
More specifically, we found:
The trend of year-to-year increases in executive compensation has reversed, in large measure because of a reduction in annual bonuses paid for 2008 performance.
Companies are generally holding the line on executives' salaries. Freezes in salary are widespread.
The value of recent equity grants has declined at many companies
2009 Proxy Season Snapshot of Executive Compensation Trends
The findings come from an analysis of compensation data from almost 200 Fortune 500 companies that had filed their proxies by the end of March for fiscal years ending between March 1, 2008, and January 31, 2009. Companies with fiscal years ending December 31 accounted for half of the total. Overall, total direct compensation (TDC) fell 2% last year for CEOs and 5% for CFOs, largely due to the drop in bonuses. Base salaries for both groups of executives increased, while long-term incentives (LTIs) showed little change The finding that base salary and LTI grant values did not show much change from historical patterns is likely due to the fact that most of these decisions are made early in companies' fiscal years, generally well before last fall's collapse in financial markets. However, the overall figures — and the underlying story — change dramatically depending on when companies made their compensation decisions, with bonuses and the value of LTI grants posting markedly steeper declines as the year unfolded and business conditions worsened. Bonuses for CEOs at companies with fiscal years ending before September 2008 were essentially flat, while bonuses were down 28% among companies with fiscal years ending in September 2008 or later. Similarly, the value of LTI grants made after September 2008 was down 23% compared to the prior year
Pay for Performance in Executive Compensation: A Reality for Most Companies
Despite the public skepticism about the link between executive pay and company performance, we found CEO bonuses for 2008 performance were aligned with business performance at most companies. Bonuses at nearly two-thirds of the companies were directionally consistent with their year-over-year change in net income, with CEOs of better performers getting paid more and CEOs of companies with declining net income getting paid less. Consistent with pay for performance, the magnitude of the change in CEO bonuses tended to correspond with changes in net income for the industry. Not surprisingly, the median for bonuses in the financial industry fell the most, by 100%, while net income in the industry fell by 40%.
Size Matters on the Downside, Too
Towers Watson's annual proxy analyses have consistently shown that size matters in executive compensation, with CEOs at the largest companies getting paid the most. That has not changed, but this year's report found that CEOs in the largest companies, on average, took bigger hits in the downturn than CEOs at smaller organizations. For example, median TDC for CEOs at companies in the top quartile of the sample (with revenues in excess of $24 billion) fell by 17%, the most for any group of companies. What happened to pay mix? Executive pay in 2008 continued to consist mostly of LTIs (62%), with the remainder split between bonus payments (18%) and salary (20%). Stock options accounted for 43% of the average LTI mix for CEOs in 2009, while restricted stock accounted for 20%, and the remaining 37% consisted of performance plans. The most common LTI portfolio at Fortune 500 companies last year was a combination of options and performance plans (28%), while 19% provided three types of plans (performance, restricted stock and options), and 15% offer stock options alone.
Executive Pay by the Numbers
In terms of specific types of compensation, here are some of our top-line findings: CEO salaries ranged from zero to $8.1 million. The annual bonus range was smaller than in past years, with a maximum award of $17.5 million in 2008, down from $44 million in 2007. Among those disclosing targets, the actual short-term incentive paid 84% of target. The number of CEOs receiving no LTI payment fell to 8% from 13%. The largest LTI award was $71 million, up from $55 million.
What's in Store for 2009 in Executive Compensation
To get a sense of likely 2009 trends in executive compensation, we examined the Compensation Discussion and Analysis disclosures filed by the compensation committees of 135 Fortune 500 companies. For this group, we found: 44% are freezing executive salaries. 10% are reducing executive salaries, with the most common approach a 10% reduction below 2008 levels. 16% saw executives forgo — or compensation committees reduce — payouts of earned incentive awards in 2008. 14% announced that 2009 annual or LTI awards will be reduced or eliminated. 7% are curbing pay for directors. These findings suggest that many companies are struggling to strike the right balance between risk and reward. They're wrestling with pay-for-performance issues, along with risk tolerance, goal setting and other challenges in an environment of great uncertainty, where defining meaningful targets is much more difficult than usual.
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