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After two consecutive years of declining pay, 2010 saw a return to increased pay for many CEOs. Equilar's recent research showed a 28.2 percent increase in median pay for chief executives in the S&P 500. Small- and mid-cap CEOs also saw their pay rebound by over 20 percent from 2009 to 2010. In all three S&P groups, cash bonuses saw the highest percentage increase of all the components, expanding more from 2009 to 2010 than salary, equity, or perks.

To discover some of the reasons for the bonus increase, Equilar studied annual cash incentive plans and their payouts among CEOs in the S&P 500 for 2009 and 2010. Researchers took the value of the annual cash incentive payout from the Summary Compensation Table (SCT) and compared it to the target values disclosed in the firm's most recent Grants of Plan-Based Awards Table (GPBAT). Although target values remained flat, payouts increased substantially, as goals (particularly those related to company earnings) proved much easier to hit.

Targets Versus Payouts

The increase in cash bonuses was due almost entirely to individuals exceeding their targets, while only a small portion can be attributed to an increase in the target amounts themselves. As the chart below shows, median target values remained relatively stable from 2009 to 2010, growing by 2.1 percent. Meanwhile, the payouts for annual performance increased by 45.3 percent.

The following chart compares the median target and payout values for annual incentive plans for CEOs at S&P 500 companies in 2009 and 2010.

Payout Levels

With the economic uncertainty of 2008 and 2009 still fresh in their minds, boards attempted to set 2010 CEO goals that took the economic situation into account. For many CEOs, however, a sooner-than-expected economic recovery aided them in hitting and, in many cases, exceeding those goals. Over 80 percent of chief executives hit or exceeded their target payouts in 2010; in 2009, only 54 percent had achieved at least target-level success.

The chart below shows the breakdown of executives' payouts, in comparison to the target values.

Metrics

Since target payouts did not provide the challenge in 2010 that they did in 2009, Equilar looked at some of the most popular metrics in these annual plans to identify which measurement proved to be the most commonly reached. The four most commonly used metrics are earnings (which include earnings per share and net income), revenue, operating income, and cash flow. Earnings were the most common metric in the annual cash plans, and also had the highest concentration of above-target payouts. 42.9 percent of CEOs reached the pay level of at least 1.5 times their target when earnings were included as a measurement for their bonus. Earnings-based payouts also had the lowest concentration of executives falling below target levels, with just 18.9 percent failing to make the grade. Operating income had the second-highest prevalence of chief executives attaining a top-level payout, with 40.3 percent. Interestingly, operating income also had the highest concentration of individuals who failed to achieve their target, at 23.9 percent.

The chart below provides a look at the four most prevalent metrics, and how chief executives stacked up against their annual-incentive-plan targets when a specific metric was used as at least part of the measurement.