July 15, 2008

US CEO Compensation Trends

The US economy is slowing down. Due to this, the large companies are aiming to link pay to performance. Hence, CEO total direct compensation is also declining.

Based upon the analysis of 350 companies within the Fortune 1000, Mercer has concluded that CEO’s would now have to depend heavily on performance based pays.

Mercer’s database of 350 companies consists of three categories.

• Top 50 with revenue of $40 billion or more

• Large with revenue of $7.4 billion or more

• Mid-size with revenue of $1.2 billion or more

Mercer analyzed median total direct compensation for CEOs, defined as base salary, short-term incentive compensation and expected value of long term incentives granted in the fiscal year.

For CEOs of the top 50 companies, median total direct compensation represented 15.8 percent reduction from the prior year.

The median total direct compensation of the CEOs of large companies did not change much from the previous year.

The CEOs of mid-size companies had a modest reduction in median total direct compensation from the previous year.

In the case of jumbo companies, the dive in total direct compensation was driven by a sharp decline in long-term incentive grant values, down 18.9%.

Over the years, the components of pay varied among the three company categories. The base salary constitutes only 19% of CEO compensation. The base salary increased only by moderate amounts amongst the three categories.

• Increase by 3.9% in the top 50 companies’ CEO

• Increase by 4.2% for large companies’ CEO

• Increase by 3.0% for mid-size companies’ CEO

The annual cash incentives on the other hand declined.

• By 13.5 % in the top 50 companies

• By 16.9 % in the mid-size companies

• By 1.6 % in the large companies

The center of the CEO compensation is long term incentives (in the form of equity). The current trend is long-term incentives (cash and equity) awards based on achieving specified performance goals.

Today, companies are considering strictly the various drivers of long-term economic value, reassessing performance metrics and realigning variable compensation. In this scenario, pay for performance is slowly becoming important.

Mercer’s analysis showed that there has not been much difference in the company-funded perquisites such as personal aircraft use, club dues and personal financial advice etc…

“Shareholders, who are experiencing deteriorating returns, are becoming more activist than ever and want to see compensation outcomes linked to sustained financial and share price results,” said Diane Doubleday, global leader of Mercer’s executive remuneration services.

If the economic outlook continues to be uncertain and unpredictable, there will be debates at many companies about whether they need to adjust, reduce, or even eliminate performance-based equity.



1 Comment »

  1. Thank you for your very interesting information!
    Always be happy to read your blog!
    Thank you very much for your work!

    Comment by TopTrendsToday — July 17, 2008 @ 11:37 am

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