Goodbye to "Hit Target, Get Bonus"
from September/October 2008
by John R. Engen
While setting pay levels remains largely an art, there’s more science being employed than in the past. Many boards are including in CEO incentive plans such metrics as top-line revenue growth, return on investment, or even subordinates’ performance, says Michael S. Melbinger, a partner and chairman of the executive-compensation practice at Chicago law firm Winston & Strawn LLP. “It used to be, ‘You hit this target, you get your bonus,’” he says about one large client’s CEO. “Today he’s responsible for everything. There are many more gradations in the formula.”
The use of peer benchmarks is slowly changing too. Pfizer, the drugmaker, is among the growing number of companies that now peg their CEOs’ pay to the 50th percentile of peers rather than the upper quartile. “More boards are saying, ‘If we have a great year, you’ll earn at the 75th percentile or higher, but in a down year you’ll be in the lower quartile,’” says Mike Halloran, a senior executive-compensation consultant with the consulting firm Mercer. “It’s getting harder to justify a center point that’s higher than the middle of the market.”
Don’t expect many tears. The average CEO of a publicly traded company makes $17.2 million in total compensation, according to the Economic Research Institute, a compensation-data firm, and CEO comp will be a lightning-rod issue going forward. An economic rebound could lead to better corporate performance—and higher pay for the guy in the corner office. “We’ll see some very large numbers and probably an outcry from shareholders,” Halloran predicts. “The question will be, how much did the CEO suffer earlier, when the share price dropped?”
