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Fortune 100 Incentive Plan Performance Adjustments

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June 3, 2016

The concept of individual performance in annual incentive plans (AIPs) is simple: Reward executives for their performance separate from the contributions of others. Plans based entirely on company-wide objectives might reward an executive—even paying out above target levels—despite sub-standard individual performance. But unlike financial or operational metrics, assessing individual performance can be difficult to measure objectively.

In a recent study of Fortune 100 AIPs, Equilar found that of the 67 companies with AIPs based on a formulaic corporate performance scorecard, 43 companies, or 64.2%, allow for some form of individual performance adjustment.

Types of Individual Performance Adjustments

Individual performance adjustments take form in one of three categories, and the percentage of Fortune 100 annual incentive plans using these types of adjustments is detailed in the chart below.

1. Discretionary adjustments to payout

2. Multipliers of payout within a defined range

3. Formal weighting—similar to how financial metrics influence payouts

Fortune 100 Individual Performance in AIPs by Type

When examining the second category, multipliers, Equilar found the widest allowable range was 0x to 2x the payout determined first by the corporate performance score. The narrowest range was 0.8x to 1.2x. The median threshold—or minimum—multiplier was 0x and the median maximum multiplier was 1.4x. At the median, the possibility of earning zero payout based on individual performance was real, while there was opportunity to earn an additional 40% for superior individual performance.

After isolating AIPs that assigned a formal weighting to individual performance, the median weighting was 30%, but weightings ranged from 20% to 33%. At the median in these plans, nearly a third of payout was at-risk based on the assessment of individual performance.

To examine the effect of individual performance on AIP payouts, Equilar isolated the individual performance component for CEOs at 36 Fortune 100 companies. Of these executives, 64.9% exceeded target individual performance, 27% performed at target and 5.4% fell below target. Thus, a majority of these CEOs met an individual performance standard that increased their AIP payout beyond the formulaic amount determined by other financial or non-financial metrics. Among this same group of companies, AIP financial metrics exceeded target performance 70.3% of the time, suggesting the majority of CEOs exceeded target individual performance in tandem with the financial results deemed favorable by their boards of directors.

Among the 36 CEOs in Equilar’s payout analysis, 28 were subject to a discretionary or multiplier adjustment based on individual performance. As shown in the graph below, of those 28 CEOs, 19 exceeded target individual performance, while one failed to meet target performance. Eight CEOs performed individually at target and received an AIP payout based purely on the company’s corporate performance score as determined by financial or non-financial metrics. For the CEOs of these large-cap companies, assessment of individual performance by the compensation committees determining their pay rarely fell below target standards.

Fortune 100 CEO AIP Individual Performance Adjustments

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For information regarding the studies referenced in this post and to purchase the underlying datasets, or to learn more about Equilar’s Research Services and performance metrics in connection to incentive compensation plans, please contact the Equilar research team at research@equilar.com.

For more information on Equilar’s research and data analysis, please contact Dan Marcec, Director of Content & Marketing Communications at dmarcec@equilar.com. Charlie Pontrelli, Equilar Project Manager, authored this post.