In the fourth quarter, companies typically begin to prepare pro forma estimates of performance versus goals and related estimates of incentive payouts. They also begin to develop the pay-for-performance story line that will be disclosed in the company’s Compensation Discussion and Analysis in the proxy statement.
Our proprietary research tells us that annual incentive plan performance measures are generally based on earnings (e.g., operating earnings, such as measured by earnings before interest and taxes (EBIT), and earnings per share). We recently completed an analysis designed to provide a macro sense of how bonuses are likely to pay out for 2013 by looking at the historical relationships between earnings and annual incentive payouts. Our analysis focused on earned versus target annual bonuses in S&P 1500 companies that had the same CEOs over the past five years (2008 – 2012) to ensure a constant sample. Discretionary bonuses were excluded, as were companies that did not disclose target bonus levels.
Year-to-date performance results for the approximately 600 S&P 1500 companies in our sample suggest a continuing slowdown in earnings growth, which may presage bonuses at or slightly below target for 2013.
Download our Executive Compensation Bulletin that provides more details of our analysis by clicking on “Download PDF” above or below.
Steve Kline, CFA, is a director in Towers Watson’s Pittsburgh office who leads the firm’s executive compensation consulting practice in the east central United States. Chris Kozlowski is an executive compensation analyst in Pittsburgh. Email firstname.lastname@example.org, email@example.com or firstname.lastname@example.org.