Executive Incentive Plans: How Leading Companies Pay for Performance
April 6, 2016
Effective executive compensation programs aim to align executive pay with measures of company
performance, and a well-designed incentive plan achieves this alignment through a rigorous
process, including the selection and weighting of performance metrics.
This report identifies incentive plan metrics for CEOs, CFOs and other NEOs in the S&P 500 to
provide a broader scope of both annual cash incentive plans and long-term incentive plans.
Beyond performance metrics for long-term incentive plans, performance periods assigned to those
awards reveal how these companies measure long-term success.
While higher-level data on the inclusion of specific performance metrics and periods is useful,
plan designers require additional details to craft plans ready to withstand scrutiny and
volatility in the marketplace. To illustrate these broad trends more completely, the report then
takes a deep dive on long-term incentive plan design for CEOs in the S&P 100. Plan details such
as the weight assigned to specific performance metrics, as well as performance goal and award
payout ranges, show how public companies balance incentives meant to drive both financial and
operational strategy with shareholder value. Narrow performance ranges, for example, leverage a
wider spectrum of payouts, thus motivating executives to improve performance—even if only by
For this report, Equilar examined the prevalence of performance metrics and performance periods
for annual cash incentives and long-term incentives of CEOs, CFOs and other NEOs at S&P 500
companies over the last four fiscal years. Years were defined as fiscal year ends between August
1st and July 31st. Equilar also analyzed the most recently disclosed long-term incentive plans
for CEOs in the S&P 100 index. The data collected for this detailed study includes performance
metrics and their weightings, performance ranges as a percentage of target performance, and
payout ranges as a percentage of target payout. Analysis for both the S&P 500 and S&P 100 study
was conducted on a “by award” basis, and data reflects the percentage or number of awards
befitting the category.
Incentive Plan Metrics for S&P 500 Executives
When companies choose measures of business success, or performance metrics, executives gain
line-of-sight into the levers they must pull to reach strategic goals while creating long-term
value for shareholders. Historically, the changes in choice of metrics for executive performance
awards show how companies have evolved the way they incentivize their leadership at various levels
of their organizations.
Long-Term Incentive Award Performance Metrics
Long-term incentive plans (LTIPs) leverage metrics to motivate executives to work towards a
company’s long-term growth and quality goals. Over the past four years, relative TSR (rTSR),
EPS, return on capital or invested capital (ROC/ROIC), revenue and operating income/margin
have been consistently the five most popular performance metrics linked to the long-term
incentive awards of executives in the S&P 500.
Overall, there has been a distinct trend toward the use of rTSR for all executives. For example,
in 2015, 25.2% of CEO incentive awards utilized rTSR as a metric, compared to 12.3% in 2012.
Meanwhile, EPS and revenue fell significantly in that same year and continued to trail off. For
example, 18.1% of CEO incentive awards utilized EPS in 2012, and that figure dipped to 11.1% in
2015. Notably, though only a part of 3% to 4% of executive incentive awards, EBITDA (earnings
before interest, taxes, depreciation and amortization) was the other metric besides rTSR that
has seen a consistent uptick over the past four years.
Press the play button to scroll through differences in the most popular long-term incentive
award performance metrics for CEOs, CFOs and other NEOs in the S&P 500. Pause to review each
graphic in depth.
Long-Term Incentive Award Performance Periods
Performance periods define the length of time over which a performance metric will be measured,
and those metrics are linked to the payout of long-term and equity incentive awards. Performance
periods typically range from one to 10 years based on individual company business models. Some
companies look to more aggressively align executive performance with shorter term goals, while
others choose longer performance periods necessary for sustained company growth.
When ideal balance is achieved, performance periods are long enough to motivate longer-term
thinking while not so remote as to stagnate performance incentives in the immediate term. As a
result, three- and four-year performance periods have gained more traction since 2012, with
three-year periods by far the most common. In 2015, three-year periods were attached to long-term
incentive awards 70.8% of the time for CEOs in the S&P 500, 75.0% of the time for CFOs and 75.0%
of the time for all other NEOs. Approximately 1% of S&P 500 performance periods were longer than
five years across the study period.
Press the play button to scroll through differences in the most popular long-term incentive
award performance periods for CEOs, CFOs and other NEOs in the S&P 500. Pause to review each graphic
Annual Cash Bonus Award Performance Metrics
In addition to long-term incentives, executives also often receive short-term cash incentive
awards based on fulfilling certain performance goals. The performance metrics for short-term
awards can differ from those assigned to long-term awards, depending on the performance periods
for long-term awards and business strategies of specific companies.
Overall, short-term performance metrics are more widely distributed than long-term incentive
plan metrics. Revenue, operating income and earnings per share (EPS) were the three most common
financial metrics among annual cash incentive awards for executives in the S&P 500. In 2015, the
most common short-term incentive metric was revenue, attached to 13.0% of awards for CEOs, 14.7%
for CFOs and 15.2% for other NEOs.
For CEOs and CFOs, the most popular metrics have waned in popularity over the years, and have
been partially replaced by less common metrics such as cost/cost ratio, industry specific metrics,
measures of safety, divisional performance and EBITDA. Of the less popular metrics, cost/cost ratio
among CFOs was the only metric to appear more than 6% of the time for any executive awards, attached
to 7.7% of short-term incentive awards for finance chiefs.
CEOs and CFOs are more likely than their other NEO counterparts to be measured by other non-financial
metrics, which can include measures of leadership, productivity, quality of services, and product and
workforce diversity. Overall, there is still a tendency to align bonuses for executives with company
financial performance, likely because this aligns with the creation of longer-term shareholder value.
However, these financial metrics are increasingly paired with non-financial metrics to encapsulate
Press the play button to scroll through differences in the most popular short-term cash
incentive award performance metrics for CEOs, CFOs and other NEOs in the S&P 500. Pause to review
each graphic in depth.
Long-Term Incentive Plan Details for S&P 100 CEOs
Beyond the decision to use specific performance metrics, incentive plan designers must consider
additional details to achieve pay and performance alignment. In a deep dive on the most recently
disclosed long-term incentive plans for CEOs in the S&P 100, Equilar went beyond the basic inclusion
of performance metrics and analyzed the influence of metrics and performance goals on payouts of
performance awards. In doing so, the study aims to uncover how leading companies achieve their
Performance Metric Weightings
Companies commonly assign multiple performance metrics for the payout of one incentive award. For
example, assigning a measure of sales (revenue) and of profit (EPS) to a single award aims to
motivate an executive to focus on both top- and bottom-line growth. In these cases, plan designers
assign weightings to individual metrics, with greater weight translating to larger influence on
In the most recently reported fiscal year, relative TSR, EPS, return on capital or invested capital
(ROC/ROIC), revenue and cash flow were the most popular performance metrics for long-term incentive
awards to S&P 100 CEOs. Relative TSR was by far the most often used, assigned to more than 40
performance awards. Each of the other most popular metrics appeared more than 15 times, where no
other metrics appeared more than 10 times.
Popularity does not correlate directly to weighting. The most popular financial metrics attached to
long-term incentive awards for CEOs in the S&P 100—cash flow, revenue, EPS, and return on capital or
invested capital (ROC/ROIC)—were typically weighted less than 50% in 2015.
Relative TSR was the most popular metric in terms of prevalence but was weighted less
than 25% for about one in five of the CEO incentive awards when it was included. Awards that measure
TSR to partially determine payouts, yet do not depend solely on TSR to encapsulate performance, provide
incentive to deliver both strong financial or operational performance—critical elements of strategic
achievement—and value to shareholders—a fundamental concern of proxy advisors and shareholders.
Along with being highly popular, relative TSR was also the most likely to account for 100% weighting, in nearly one
out of every three awards to which it was assigned. Revenue was weighted between 26% and 50% most often of
any metric in the study—76.2% of the time. Most prevalent on the low-end, cash flow was assigned a
weighting in the bottom quartile 31.3% of the time.
Performance ranges set expectations for the degree to which executives will receive and maximize
their payouts. The connection between set performance goals—or targets—and award payouts creates
the link between pay and performance. These types of incentive plans inevitably result in portions
of executive pay being “at risk,” or variable, meaning that poor performance can result in little
or no payout compared to target amounts.
Among CEO performance awards in the study, performance thresholds—or the minimum performance that
results in the payout of an award—for long-term incentives were largely above 80% of target
performance in 2015. Of the 65 awards that included reported threshold performance, 51 were between
80% and 100%, meaning that in order for these executives to receive any payout, the company would
have to hit at least 80% of its target performance goal. The largest grouping of performance thresholds
occurred even higher, between 91% and 100%.
Maximums, or the point beyond which higher payouts are no longer achieved, occurred largely in the 101%
to 120% of target performance range. Of the awards that included reported maximums, 49 fell within
this range, meaning that executives would receive the largest possible award if the company
achieved 101% to 120% of target performance.
Award payout ranges as a percentage of target amounts were much wider than performance ranges,
indicating that incentive plans leverage small, incremental change in performance into larger
changes in award payouts. The most popular threshold as a percentage of target payout for long-term
incentives of CEOs in the S&P 100 was 50% in 2015, and the risk of earning 0% of the target award
was not uncommon. In other words, if a company did not reach its threshold for company performance,
most executives were eligible for at most half of their target payout, and frequently nothing at all.
Maximum payout was most typically capped at 200% of target, with more than half of the awards in the
study topping out at twice the target amount. The largest maximum in the study was 300% of target.
As an example of how these work in tandem, in its 2015 proxy
(filed 03/30/15, p. 37), American Express displayed payout and performance
ranges together to show how performance over the previous three years resulted in a payout.
Executives at the company received 102.8% of the target award when the company exceeded the 3-year
average return on equity target of 25%.
PLEASE READ THE IMPORTANT DISCLOSURES BELOW
1 “Performance Awards: Trends, Challenges & Equity Edge®,” E*TRADE Financial Corporate Services,
Inc. Equilar Inc., and Hay Group White Paper, 2009.
2 “2015 Equity Trends Report,” Equilar Inc. featuring commentary from E*TRADE Financial Corporate
Services, Inc. , 2015.
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.
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The contributing authors of this report were Heather Kerr and Hannah Dumas, Research Analysts, and
Matthew Goforth, Equilar Research and Content Specialist.