Best-Performing CEOs' Long-Term Incentives Substantially Above Target

By Stephen Miller Feb 26, 2008
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Chief executive officers whose companies financially outperformed their peers over a three-year period received long-term incentive award payouts that were more than 50 percent above their target, according to an analysis by consultancy Watson Wyatt Worldwide.

The analysis shows that:

  • CEOs at high-performing companies—those with total returns to shareholders (TRS) above the median from 2004 to 2006—were rewarded with long-term incentive payouts that were 156 percent of their targets.
  • Conversely, CEOs at low-performing companies—those with a TRS below the median—received median payouts of just 71 percent of target.
  • Overall, CEOs earned median payouts slightly above target at 114 percent.

Long-Term Performance Plan Payouts

Three-Year Total Returns to Shareholders

Median Payout as

Percent of Target

High performers

101%

156%

Low performers

33%

71%

All companies

62%

114%

Source: Watson Wyatt Worldwide

The analysis was based on CEOs at 177 companies who remained in their jobs for the three-year period and who received long-term performance share or cash awards. It did not include stock options or restricted stock awards that the CEOs may have also received.

“The fact that high-performing companies rewarded their CEOs with above-target payouts shows a strong correlation between pay and performance,” says Ira Kay, global director of compensation consulting at Watson Wyatt. “We believe that for the most part, strong company performance led to above target awards. While there may be a few cases of companies setting goals that were too easy to achieve, it’s clear that rewards play a crucial part in driving most CEOs to excel.”

The analysis also found that:

  • High-performing CEOs, as measured by one-year earnings per share growth, received median annual incentive payouts that were 11 percent above target.
  • However, CEOs at low-performing companies still received their target bonus payout.

“With the SEC disclosure rules now in effect for the second year, performance goals for annual and long-term incentive plans are sure to attract more attention this proxy season," Kay says.

Although many companies are still deciding whether to disclose performance goals used in their executive pay programs, he adds, "We expect companies will continue to focus on shareholder-friendly core pay elements. They will also continue to reinforce the link between pay and performance through increased transparency and difficult but attainable performance goals.”

Stephen Miller is manager of SHRM Online's Compensation & Benefits Focus Area.

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