ARLINGTON, VA, April 16, 2015 — Chief executive officers (CEOs) at the nation’s largest corporations saw their total compensation accelerate last year at its fastest clip since 2010, according to a new analysis of proxy disclosures by global professional services company Towers Watson (NASDAQ: TW). Higher pension values, larger annual incentive payouts and higher values of long-term incentives granted last year all contributed to the large increase in total pay.
The Towers Watson analysis found total pay for CEOs jumped 12.1% in 2014, sharply higher than the 1.6% median increase CEOs received in 2013. Total pay, as reported in the Summary Compensation Table (SCT) in company proxy statements, includes base salary, actual annual and long-term cash bonuses, the grant-date value of long-term incentives (such as stock options, restricted stock, and long-term performance shares), the value of perquisites, earnings from deferred compensation and the change in value of executive pensions. Much of the increase in total pay can be attributed to significantly higher values for pension benefits, driven up by lower interest rates and changes to mortality tables. In fact, if the change in pension values were excluded from the analysis, total SCT pay would have increased 8.1%.
The analysis, based on 500 S&P 1500 companies that filed proxies disclosing 2014 pay by late March, noted that CEO salaries increased 2.9% in 2014 (about the same increase as in 2013), while target annual bonuses increased 3.3% at the median. Additionally, 62% of companies paid annual incentive awards to CEOs that were above target levels, compared with 53% in 2013. Target long-term incentives, the largest component of executive pay in major companies, increased 7.1% at the median in 2014, up from an increase of 5.9% in 2013.
“Last year was another strong year for CEO compensation,” said Todd Lippincott, North America leader of Executive compensation at Towers Watson. “At the same time, the results show that companies continue to manage their executive pay programs carefully. Last year was a good year financially for many companies and their shareholders. The fact that CEO pay accelerated in a year when revenue growth, earnings and shareholder returns shined demonstrates that CEOs are being rewarded for performance.”
The analysis also found that the long-term performance plans are now the most prevalent long-term incentive vehicle and account for the largest portion of the long-term incentive mix. Three in four companies (75%) grant a mix of long-term vehicles, two-thirds of which combine performance plans with one of two forms of equity vehicles (stock options or restricted stock), while the other one-third grants all three vehicles.
Strong Shareholder Support for Say on Pay in Fifth Year
The fifth year for mandatory say-on-pay votes is off to another relatively positive start, based on Towers Watson’s research. Among the 151 of the Russell 3000 companies that disclosed their shareholder voting results by April 11, shareholder support averaged 90%. This is roughly the same level of shareholder support as in each of the first four years.
“Despite a relatively quiet say-on-pay proxy season so far, we fully expect that executive compensation programs will remain under pressure from shareholders. Especially if markets start to soften, companies and their compensation committees will continue to fine-tune their programs to reinforce the link between pay and performance,” said Lippincott.
Other findings from the Towers Watson proxy analysis include:
- Change-in-control payments at acquisitions. Just over half of companies (51%) use severance multiples of two or less for change-in-control payments to CEOs at the time of acquisitions, with two being the most common. Three in 10 companies use a multiple of three.
- Pension value changes. More than four in 10 companies (41%) reported a change in pension value and nonqualified deferred compensation earnings in 2014. The median change was 108% from 2013 to 2014.
- Total pay varies by company size. CEOs at small-cap companies received the largest increase in total pay (SCT) in 2014, compared with their counterparts at larger companies. Total pay for small-cap CEOs increased 13.7% from 2013 to 2014, compared to 11.6% for CEOs at large-cap companies and 10.6% for CEOs at mid-cap companies.
About Towers Watson
Towers Watson (NASDAQ: TW) is a leading global professional services company that helps organizations improve performance through effective people, risk and financial management. With 15,000 associates around the world, the company offers consulting, technology and solutions in the areas of benefits, talent management, rewards, and risk and capital management. Learn more at towerswatson.com.