Use of Performance Awards on the Rise as Part of Executive Compensation

Document created by 1050210 on Nov 13, 2014
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Published Date: 08/25/2014

 

Reneé Watkins

By Reneé Watkins

 

Mercer, a global consulting leader in talent, health, retirement and investments, recently completed its annual analysis of executive compensation data. The analysis encompassed 240 of the companies included in the Standard & Poor’s (S&P) 500, between the years 2011 and 2013. Executive compensation was comprised of base salaries as well as awards tied to performance.

 

Analysis of the data reveals approximately two-thirds of CEO annual compensation is tied to long-term incentive-based performance awards such as stock options or restricted shares. The average total compensation was listed at $9.6M with $6.4M tied to performance across the 240 companies surveyed. This represented an increase of four percent over each successive year.

 

The use of restricted stock with a vesting schedule as a performance award remained relatively flat at 22 percent among those companies surveyed in 2011, 2012 and 2013. The award of performance shares grew steadily from 41 percent of companies in 2011 to 56 percent of companies in 2013. Stock options as a performance award continued to fall from 35 percent in 2011 to 25 percent in 2013.

 

The main reason behind the increased use of performance awards over stock option grants among companies is that performance awards are more directly tied to the financial and operational performance of the company over time, whereas stock option values can be manipulated up or down by the current market trend. Performance awards have a specific value that can be quantified by the corporate financials, whereas stock options do not necessarily reflect a company’s financial health.

 

It was also interesting to note, the top 100 companies of the S&P 500 were far less generous with performance awards than the lower 400 companies in the S&P 500. This trend is likely to continue as the smaller companies “catch up” to the larger companies in overall compensation for their executives. Raising compensation averages is how the smaller S&P 500 companies are able to recruit top executives who may be more attracted to the larger 100.

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