Study Examines Link between Executive Pay and Company Performance at 10 Top American CitiesLocation: Chicago Research released by BDO examined the link between executive pay and company performance in 10 cities across the US. Surprisingly, the CEOs of companies with the best performance – expressed by total shareholder return year-over-year – did not necessarily receive the highest pay increases. While overall, CEOs of companies with positive shareholder returns received pay increases and those with negative shareholder returns saw pay decreases, there were notable exceptions to this trend, especially in the margins for each group. “Tying pay to company performance is critical now given the increased scrutiny both from regulators and shareholders around executive pay” When comparing the bottom tier of the top performing companies with the top tier of the bottom performing companies across all 10 cities, the links between pay and performance became elusive. The one constant across all 10 cities is that CEO compensation decreased (by 21%) for the companies with positive shareholder returns who were on the lowest quartile. This may be attributed to the fact that while year-over-year shareholder returns are up, they are likely bouncing back from extreme lows due to the financial crisis and still have not returned to pre-crisis levels… prompting a more conservative approach to managing pay. Conversely, the top tier of the bottom performing companies saw a median increase of 9 %…possibly a sign of a more liberal approach to managing pay by rewarding efforts to minimize losses while offering incentives for turnaround and retention of executives. Chicago, Atlanta and LA had the smallest discrepancy between pay and performance with each seeing an average of 30% difference in pay versus performance, as opposed to a 110% difference in New York, 80% in Houston and 75% in Dallas. “Tying pay to company performance is critical now given the increased scrutiny both from regulators and shareholders around executive pay,” said Mike Conover, Senior Director in the Compensation and Benefits Practice at BDO. “The typical analyses of CEO pay focus only on the very largest companies and mix good and bad performers together; the resulting averages tell us nothing about performance and pay. Our analysis showed us that larger performance-based awards explained the positive compensation change observed in the year-over-year comparison for top performers. However, we also noticed that some of these top performers did decrease salaries, short-term and stock-based incentives. This certainly dampened the magnitude of pay changes for some in the top performing group. Similarly, we observed salary increases, larger bonuses, options and stock grants among some of the poorer performing companies that cushioned the magnitude of the decline in pay from the prior year.” Undoubtedly, 2009 was certainly one of the most challenging years on record in terms of business conditions and the compensation decision making associated with them. While not the case in every situation, it appears that pay and performance were still connected. As we’ve noted, groups on the margins may have proved contrary to the expectation that positive shareholder returns equal pay increases and vice versa. However, of the top 25 performing companies in each city – the median company increased shareholder returns by 98% and increased pay by 6%, compared to the bottom 25 performing companies who decreased shareholder returns by 11% and decreased compensation by 9%. The following is a breakdown of median shareholder return compared to pay increases in the top 25 and bottom 25 performing companies in each city:
Further findings of the 2010 BDO Compensation Trends by City Study:
To subscribe or visit go to: http://www.riskcenter.com |