LTI Levels Rise as Boards Stay the Course on Pay Alignment

Median CEO pay for 2016 is up 5.5%, according to a 2017 Proxy Season-Early Trends report. The increase is mostly attributable to the 6.5% rise in the grant-date values of long-term incentive (LTI) awards.

The rise in long-term incentive awards for 2016 could be partially due to a catch-up effect after last year’s LTI payouts were relatively flat since 2015 total shareholder return (TSR) levels were down at many companies, says Aalap Shah, managing director at Pearl Meyer. “As they were setting the 2016 target long-term incentive level, and trying to access against market, there tended to be an uptick [in LTI grants],” he says.

While long-term equity pay has continued to make up the bulk of total compensation for CEOs, some boards are starting to pay more attention to annual cash bonuses. Shah explains, “We are starting to hear conversations in the boardroom about, ‘Do we really have this balance right?’ and … 'In this pursuit to ensure long-term value creation, have we forgotten about all of the short-term levers that we actually need?’”

In 2015 and 2016, many companies took a bit of a “steady state” type of focus on their pay programs overall due to the nervousness about what was going to happen with the election process and disclosure rules, particularly the CEO pay ratio and pay-for-performance rules, says Shah. He says this uncertainty has continued to impact compensation committee members’ decision making going into 2017, and while there may be tweaks here and there, there is little appetite for big program changes.

Boards could feel more confident in making structural changes to their compensation programs after 2017. Shah explains that boards may have a little bit more freedom to change their compensation programs once there is more clarity regarding the implications of regulatory changes and the economic outlook.