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CEO Compensation Increased Slightly in 2011

from Towers Watson

Compensation for chief executive officers (CEOs) at the nation’s largest corporations showed only a moderate increase in 2011, despite improved financial results, according to a new analysis of proxies conducted by Towers Watson, a global professional services company. The analysis also found that most companies are receiving strong support in the second year of mandatory say-on-pay shareholder votes.

The Towers Watson analysis found that median annual salaries increased 2.6% for CEOs in 2011, while annual bonuses paid were flat. That marks a reversal from 2010, when salary increases were flat and annual bonuses increased by 21%. Total direct compensation, which includes salary, annual bonuses plus the grant value of long-term incentives, including stock options, restricted stock and long-term performance plans, increased 5.6% in 2011. That compares with an increase of 14.5% in 2010.

The analysis also found that CEO annual bonuses began to shift back toward more typical distributions around target levels, compared with 2010. Far fewer companies paid bonuses greater than 150% of target in 2011, while more companies paid bonuses ranging from 100% to 125% of target. In addition, rising stock prices fueled significant growth in the levels of pay realized by CEOs last year. While the target opportunity for long-term incentive grants awarded to CEOs in 2011 rose 5.7% at the median, the value of long-term incentives realized rose 32%.

“It appears that most companies managed their executive compensation programs thoughtfully last year,” said Doug Friske, global head of executive compensation consulting at Towers Watson. “After seeing CEO pay levels increase sharply two years ago, reflecting the sharp rebound from the economic crisis, a return to more moderate increases last year makes sense in view of companies’ financial results. Our analysis also underscores the strong link between pay and performance, and that companies are paying attention to shareholder concerns.”

The analysis also found that the 103 companies that have disclosed their shareholder voting results both in year one and in year two of mandatory say-on-pay votes so far reported average support of 90% of the votes cast this year. That is consistent with last year’s voting results. Only one company in this sample failed to win majority support for its say-on-pay resolution to date in 2012. Most companies (82% of the Russell 3000) will hold say-on-pay votes this year as a result of decisions to hold votes annually.

“Most companies continue to get pay right, which is important, as our research confirms that there are significant negative consequences from standing out from the crowd, setting up some interesting dynamics for compensation committees and management,” said Friske. “Clearly, companies are increasingly sensitive to shareholder concerns, and the increased emphasis on performance metrics, goals and the alignment with pay is an outgrowth of that.”

Other findings from the Towers Watson proxy analysis include:
• Three in four companies now provide an executive summary in the Compensation Discussion & Analysis (CD&A) section of their proxies, up from 55% in 2011.
• While almost all companies say they pay for performance, less than two in 10 (19%) provide an analysis to support that linkage.
• As companies continue to focus on ensuring that incentive program metrics are well calibrated, 16% of companies exercised discretion to reduce bonuses, while 6% reduced long-term incentive payouts.
• The mix of long-term incentives offered by major U.S. companies continues to evolve. For example, the median percentage of long-term incentive value delivered through long-term performance plans has increased from 34% in 2009 to 40% in 2011. Meanwhile, the percentage of long-term incentive value provided through stock options declined from 43% in 2009 to 34% last year. The balance is delivered via restricted stock.

About the Analysis
The Towers Watson analysis is based on a review of 2012 proxies filed by 225 Fortune 1000 companies that had filed their proxies by late March.

Towers Watson 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 employee 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.

Topic tags: board of directors, corporate governance, executive compensation, say on pay



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