Long Term Incentives Linked to Performance

April 9, 2007 (PLANSPONSOR.com) - Shareholders are apparently moving closer to getting their money's worth in the executive suite, a new Mercer Human Resource Consulting survey indicated.

The big story this year is that, as predicted, long-term incentives are being linked to performance, Mercer’s executive compensation survey found. The number of CEOs receiving option grants declined from 192 in 2005 to 185 in 2006 and the number of CEOs receiving restricted stock grants declined from 181 to 172 in the same period.

However, the number of CEOs receiving performance shares, including performance-contingent restricted stock, jumped from 111 in 2005 to 178 in 2006. The portion of the CEOs’ pay that was made up of performance-based shares and units jumped in the period 2005 to 2006 from 21% of the pay mix to 31%, while restricted stock was stable, rising slightly from 22% to 23%, and stock options dropped from 52% of the pie to just 46%. As recently as 2002, restricted stock made up 76% of CEO pay.

With data generated for the first time this year by newly required proxy disclosures about the value of executive compensation, benefits and perquisites, according to a Mercer news release, the median change in CEO total direct compensation (salary, bonus and long-term incentives) was 8.9%. At the same time, corporate net income jumped by 14.4%, up from 13% in 2005; while total shareholder return was 15.1%, more than double the 6.8% return in 2005, Mercer said.

“We have been predicting the rise of performance-based equity awards for several years,” said Diane Doubleday, global leader of Mercer’s executive remuneration business, in the news release. “At the heart of shareholders’ expectations for pay aligned with performance is the structure of long-term equity programs, specifically programs that vest or pay out based on performance. As of 2006, the accounting rules that facilitate using performance-based equity were in effect for almost all companies. As a result, we now see a significant increase in performance shares and performance-contingent restricted stock. In addition, the new disclosure rules include previously unknown information about performance goals and targets.”

Not ‘Eye-Popping?’

According to the study of the 350 largest public companies, total compensation (total direct compensation plus benefits and perquisites) is not as “eye-popping as expected.”

Mercer reported a median total of $8.2 million. The new elements totaled less than $1.3 million at the median or approximately 15% of the median CEO package. Most of the added worth came from the annual increase in pension values; the reported median increase was approximately $1 million, Mercer said

The survey found that CEO base salary increased to a median $995,000 after having been at $975,000 for two years. Constant incumbent CEOs received a median increase of 4.1%, higher than the median increase of 3.6% in 2005. In 2006, about one quarter of the CEOs did not get a pay increase; boards were tougher in 2005, when one third of the sample did not get a pay increase.

According to the news release, the survey also examined trends in nine major industries. CEOs in the oil and gas sector, for example, had the highest level of total direct compensation among the nine industries analyzed, with a median of $11 million.

But the median increase for constant incumbents in the oil and gas sector was the lowest of the industries analyzed at only 1.3%. Total shareholder return for companies in the oil and gas business was a strong 18.2%. The consumer goods sector had the lowest total shareholder return (7.8%), but the constant incumbent CEOs in the group saw median increases in total direct compensation of 10.5%.

The Mercer Human Resource Consulting 2006 CEO Compensation Survey analyzes and reports on the most current publicly available compensation information as disclosed in the proxy statements of 350 large U.S. companies.