REDWOOD CITY, CA (March 29, 2017) — Relative total shareholder return (TSR) continues to be the most popular measurement tying CEO pay to performance in the S&P 500, according to a new report from Equilar, Executive Long-Term Incentive Plans: Pay for Performance Trends, featuring independent commentary from E*TRADE Financial Corporate Services, Inc. However, return on capital (ROC) and earnings per share (EPS) saw a bump while rTSR flattened out in fiscal year 2015—the most recent year with comprehensive pay data available for this group of companies.
TSR as a performance metric has come under scrutiny from compensation professionals in recent years, even while it saw a significant rise from 41.6% in 2011 to 57.4% in 2014 for S&P 500 CEOs. Plan designers recognize that it represents shareholder value over time, but have begun to question its ability to incentivize CEO behavior and performance. Executives can engage in activities they believe will influence TSR, but they cannot directly control all the factors that influence the outcome.
As a result, other popular metrics like ROC and EPS saw a resurgence in 2015. Only ROC consistently increased every year in the Equilar study, rising from 26.1% in 2011 to 30.6% in 2015 for CEOs. While EPS declined each year between 2011 and 2014, usage of this metric in 2015 increased from 27.3% of companies to 29.2% in 2015, though still below its high in 2011 of 34.6%.
“Both compensation committees and shareholders are looking for the best links between pay and performance,” said Matthew Goforth, Managing Editor at Equilar. “Though TSR helps balance executive pay with shareholder returns, profits and return on company investments have emerged as consensus picks for tying day-to-day operations to long-term value creation.”
“Many companies are challenged with defining how to measure their success, and who they will measure themselves against, as peer groups are not always easily defined based solely on size and/or industry sector. Similarly, the time period for tracking rTSR can produce varying results, which creates additional complexities to consider,” added Craig Rubino, Director of Corporate Services for E*TRADE Financial Corporate Services, Inc. “That is why companies often include more than one metric, allowing them to also track performance based on goals like internal restructuring, product growth or other business line measurements.”
Indeed, the Equilar report also took a deep dive into performance metric weightings for the S&P 100, and found that more often than not, rTSR was included alongside at least one other metric to achieve performance awards. The study found that 35.9% of the time rTSR appeared in CEO incentive plans, meeting target goal accounted for half of the payout.
Meanwhile, when ROC or EPS were included as a performance award metric, they were most commonly weighted 100%—in other words, receipt of the award was fully dependent on meeting goals tied to those particular measurements. The chart below shows the most common weightings for the three most popular performance metrics among S&P 100 CEOs.
|50% of award||100% of award|
“Most compensation committees want to design clear and understandable incentives, so linking one or two performance metrics to a single award is common,” said Matthew Goforth. “Even when an incentive is tied to one weighted metric, ROC for example, it doesn’t preclude a committee from adjusting the award’s payout based on TSR performance. Sometimes there is more than meets the eye.”
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About the Report
Executive Long-Term Incentive Plans: Pay for Performance Trends, featuring independent commentary from E*TRADE Financial Corporate Services, Inc., examines performance metrics and performance periods for long-term incentives of CEOs, CFOs and other NEOs at S&P 500 companies over the last five years. The report also took a deeper dive into the most recently disclosed long-term incentives for CEOs in the S&P 100 looking at performance metrics, performance metric weightings, performance ranges as a percentage of target performance and payout ranges as a percentage of target payout.
Equilar is the leading provider of board intelligence solutions. Companies of all sizes rely on Equilar for their most important boardroom decisions, including 70% of the Fortune 500 and institutional investors representing over trillion in assets. Equilar offers data-driven solutions for board recruiting, executive compensation and shareholder engagement that bring together business leaders, institutional investors and advisors to drive exceptional results while ensuring sound corporate governance. The Equilar suite of solutions includes industry-leading board education symposiums, comprehensive custom research services and award-winning thought leadership. Founded in 2000, Equilar is cited regularly by Associated Press, Bloomberg, CNBC, The New York Times, The Wall Street Journal and other leading media outlets. Learn more at www.equilar.com.
About E*TRADE Financial Corporate Services, Inc.
E*TRADE Financial Corporate Services, Inc. is a premier provider of equity compensation administration tools for some of the nation’s leading organizations, serving 1.4 million+ participants1. We offer flexible, easy-to-use and powerful solutions for equity compensation management, including support for most equity vehicles, and seamless access for participants to services / education from E*TRADE Securities LLC. For 5 years running, E*TRADE’s proprietary Equity Edge Online® platform has been rated #1 for Loyalty & Overall Satisfaction in Group Five’s Stock Plan Administration Study2.
The data and analysis contained in this publication has been prepared by Equilar. The commentary, where noted, has been provided by E*TRADE Financial Corporate Services, Inc. Equilar is not affiliated with E*TRADE Financial Corporate Services, Inc. or the E*TRADE Financial family of companies.
1 Data as of 12/31/16.
2 As of July 1, 2016, Group Five Stock Plan Administration Benchmark Study and Financial Reporting Benchmark Study rated Equity Edge Online® highest in Loyalty and Overall Satisfaction for the fifth consecutive year (2012-2016) among all plan sponsors who use a commercial system to manage the recordkeeping of their stock plans in-house. Group Five, LLC is not affiliated with E*TRADE Financial Corporate Services, Inc. or the E*TRADE Financial family of companies.
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