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CEO total compensation continues to rise during the say-on-pay era, according to Equilar’s 2017 CEO Pay Trends report. The report found that some boards are no longer providing CEOs with annual salary increases but, instead, are electing to make periodic adjustments. This finding is consistent with recent data from Pearl Meyer.
“[In] our latest data, we saw a year-over-year increase in the base salary for CEOs at zero percent at the median,” says Aalap Shah, managing director at Pearl Meyer. “You definitely are seeing companies that are reluctant to increase base salaries at the top of the house as shareholders are pushing for more and more performance-based pay,” he says.
Some boards are exceeding ISS guidelines for performance-vesting pay. In 2016, 54.9% of the median LTI mix was performance-based shares, according to Equilar. Interestingly, approximately 15% of CEOs received 100% of their LTI award in performance shares.
Shah says the 100% performance share concept has come over from Europe. “If you look at the U.K. companies, a majority…have 100% performance shares,” he says.
If a CEO has already achieved some level of wealth, the board might decide to shift emphasis toward a greater portion of performance-based awards. Shah is concerned about the possibility of "group think" among boards as performance share usage grows. “I think what’s happening is that everyone is looking at the marketplace and saying, ‘OK, everyone is using performance shares, [so] we need to put them in,’ without fully vetting that internally and asking are performance shares really the right thing for [the company],” he says. Shah suggests boards make sure they are creating long-term incentive programs that tap into the corporate culture as well as the kind of strategy that is needed to unlock future value creation.
Some experts are concerned that LTI plans have become less balanced amid the increased use of performance shares. “Going back to 2012, you had more of a balanced mix in long-term plans,” says Shah. “It was more prevalent to have stock options, performance shares and time-vested restricted stock.” He says the balanced portfolio approach has significantly decreased.
Restricted stock and other time-based awards help to balance out the LTI mix and act as a hedge to performance-based awards, says Shah.