Mercer: More Pay for Performance Schemes for CEOs

April 10, 2006 ( - A survey by Mercer Human Resource Consulting of recently filed corporate proxy statements shows that CEO pay and corporate performance are closely aligned.

A Mercer HR news release said the median CEO base salary remained flat at $975,000 and that one-third of the CEOs received no base salary increase last year. The median annual CEO bonus rose 8.4% to $1.4 million. Total annual compensation (base salary plus annual bonus) rose 7.1% to $2.4 million, continuing the trend of aligning cash compensation with corporate profitability, Mercer HR said in the announcement.

Further, Mercer found that continued pressure on long-term incentives (notably stock options) kept median total direct compensation (base salary, annual bonus, and the present value of long-term incentives) for CEOs in check, rising 5% in 2005 to $6.8 million. That compensation hike corresponds closely with the median 6.8% total shareholder return in 2005, another indication that efforts to forge a stronger connection between CEO compensation and company performance are having the desired effect, Mercer researchers said.


“The close alignment of pay and performance reflected in the 2005 Mercer survey numbers indicates that organizations are moving toward more responsible executive compensation,” asserted Peter Chingos, a senior executive compensation consultant with Mercer in New York, in the news release.

Just a few years ago, CEO compensation was, for the most part, all about equity. In 2002, long-term incentives (LTI) represented 68% of the total CEO pay mix. By 2005, according to the survey, LTI represented 62% of the pay mix. Stock option use also continued to decline, from 57% of LTI value in 2004 to 52% in 2005.

Use of restricted stock rose from 22% of LTI value in 2004 to 26% last year. There is more evidence that companies are rebalancing the long-term component: the number of CEOs receiving stock option grants dropped from 273 in 2004 to 265 last year, while those receiving restricted stock grants jumped from 166 to 181 over the same period. In particular, performance-based LTI awards are being used by 57% of the surveyed companies, up from 51% in 2004 and only 37% in 2003.

Mercer’s CEO Compensation Survey also looks at trends in 10 major industries. In 2005, the median percentage increase in total annual compensation (base salary and bonus) outpaced the median increase in net income in only three of the 10 industries. Median total annual compensation for the CEOs increased significantly in just two of the sectors – utilities (26.1%) and telecommunications (24.3%) – last year

The Mercer Human Resource Consulting 2005 CEO Compensation Survey analyzes and reports on the most current publicly available compensation information as disclosed in the proxy statements of 350 large US companies.