CEO and Executive Compensation Practices: 2015 Edition

Matteo Tonello is Managing Director at The Conference Board, Inc. This post relates to CEO and Executive Compensation Practices: 2015 Edition, an annual benchmarking report authored by Dr. Tonello with James Reda of Arthur J. Gallagher & Co. For details regarding how to obtain a copy of the report, contact

The Conference Board, in collaboration with Arthur J. Gallagher & Co., recently released the Key Findings from CEO and Executive Compensation Practices: 2015 Edition, which documents trends and developments on senior management compensation at companies issuing equity securities registered with the U.S. Securities and Exchange Commission (SEC) and, as of May 2015, included in the Russell 3000 Index.

The report has been designed to reflect the changing landscape of executive compensation and its disclosure. In addition to benchmarks on individual elements of compensation packages and the evolving features of short-term and long-term incentive plans (STIs and LTIs), the report provides details on shareholder advisory votes on executive compensation (say-on-pay) and outlines the major practices on board oversight of compensation design.

Compensation data is examined and segmented by business industry and company size (measured in terms of annual revenue). For the purpose of the industry analysis, the report aggregates companies within 10 industry groups, using the applicable Global Industry Classification Standard (GICS) codes. In addition, to highlight differences between small and large companies, findings in the Russell 3000 Index are compared with those from the S&P 500 Index. The S&P 500, or subset of the S&P 500, is also used to further investigate certain compensation practices, such as changes in pension value, perquisites, and incentive plans. Figures and illustrations used throughout the report refer to the Russell 3000 analysis unless otherwise specified.

The following are some of the Key Findings. The full report, which includes more than 120 benchmarking tables, will become available in late September 2015.

Total CEO compensation continues to grow, fueled by pension value adjustments, stock market performance, and peer pressure Median total compensation for the CEO of an S&P 500 company was $11,291,000 in 2014, while the Russell 3000 counterpart earned $3,885,000. Both figures represent a significant increase from previously recorded levels and confirm the steady pattern of growth documented over the last few years. In the Russell 3000, the median total CEO compensation was 11.9 percent higher than in 2013 and 34.7 percent higher than in 2010; in the S&P 500, CEO pay increased 10.6 percent in 2013 and was 20 percent higher than in 2010. In the industry analysis, the largest increase since 2010 was observed among healthcare companies (median 73.6 percent). The extraordinary stock market performance following the financial crisis of 2008–2009 and the board practice of using peer group benchmarking in the compensation design process help explain the five-year rise in total pay. However, the significant 2014 adjustments to pension value prompted by official revisions to discount rates and mortality tables were, by far, the most-important drivers of the one-year growth in total CEO compensation at many larger companies.

Larger company CEOs earn significantly more overall, but the smallest companies had the highest five-year percentage growth in CEO compensation In 2014, the CEO of a manufacturing or nonfinancial services company with annual revenue of at least $50 billion (the largest of the size groups analyzed) made eight times as much as the CEO of a company with annual revenue under $100 million (the smallest of the groups analyzed). However, it was the smallest group that saw the steepest five-year increase in total compensation. CEOs of these organizations earned $2,189,000 in 2014, or 135.9 percent more than their reported total pay in 2010 and 31.8 percent more than their reported total pay in 2013. In comparison, the median CEO in the largest revenue group ($50 billion and over) received a five-year raise of 20.5 percent, suffering a dip in 2012 and 2013 and rebounding in 2014 (+25.5 percent). Smaller companies continue to rely on stock options to compensate their top talent.

CEO compensation surged in the healthcare sector between 2010 and 2014, with stock options weighting significantly more on total pay The compensation of CEOs of healthcare companies grew by 73.6 percent in the 2010–2014 timeframe, from $2,096,000 to $3,638,000—the largest rise in the five-year period among any sector. The mix analysis showed the increasing incidence of stock options in the pay package offered to CEOs in this industry, offsetting the declining weight of base salary. More specifically, stock options represented 34.3 percent of the total CEO compensation value in 2014, up from 27.6 percent in 2010. Instead, the weight of the base salary declined from 31.5 percent in 2010 to 21.5 percent in 2014.

In 2014, the telecommunications services sector reversed a long trend of declining total CEO compensation value; consumer discretionary was the only industry reporting a median pay drop The industry with the biggest year-on-year CEO pay increase was telecommunications services. Total CEO compensation in that sector grew 43.6 percent in 2014, compared to the median 11.9 percent increase across the Russell 3000 sample. However, the substantial jump reversed a long downward trend for the sector, given that telecommunications services companies showed the biggest CEO compensation decline of any sector in the 2010–2014 period. Consumer discretionary (i.e., the sale of nonessential goods and services, such as automobiles and components, media, and apparel) is the only business sector that saw a median decline in total CEO compensation in 2014 (-12.2 percent from 2013 levels).

Only a small part of CEO earnings comes from base salary; performance-based components now dominate The analysis of CEO compensation packages by component type shows that base salary paid in cash represents only a small fraction of the total amount of realized pay—more specifically, 23.8 percent of the total in the median Russell 3000 company and as little as 11.6 percent in the median S&P 500 company. As companies continue to respond to stakeholder demand for pay for performance, the weight of performance-based elements has grown. In particular, the grant-date value of long-term incentive (LTI) awards (stock awards and stock options) constituted 57.2 percent of the total CEO compensation reported in 2014 in the S&P 500, compared to 55.8 percent in 2010. Earnings per share (EPS) is a commonly used metric of long-term performance; according to S&P Capital IQ data, in 2014, EPS has climbed 7 percent for the average company in the index, unlocking additional rewards for chief executives. [1]

Annual bonuses were up in 2014, with the largest five-year increase rate among smaller companies In general, annual bonuses in Russell 3000 companies increased by 11.8 percent from 2013 and 15.3 percent since 2010. Companies with annual revenue of more than $50 billion paid a median $3,440,000 annual bonus to their CEOs in 2014, or a 23.7 percent increase from the previous year. However, a five-year analysis shows that the largest percentage increase in bonuses took place among small companies with less than $100 million in revenue. The annual bonus granted to the median CEO in these smaller companies doubled from $126,000 in 2010 to $253,000 in 2014. In fact, over the same five-year period, annual bonuses in the S&P 500 index have been on the decline (-3.6 percent), a finding that is consistent with the more general trend toward the adoption of equity-based compensation components by larger corporations in recent years.

Stock awards continue their rise as the most important component of CEO compensation, even though significant variation in use is seen across industries and size groups Stock awards continue to increase their share within the pay mix, while other compensation components, such as base salary, annual bonus and stock options, are going in the opposite direction. According to 2014 disclosure, stock awards represent 42.3 percent of CEO pay at the average S&P 500 company and 34.7 percent of CEO pay at the average Russell 3000 company, up from 33.4 percent and 24.9 percent in 2010, respectively. However, the industry and company size analyses show that there can be significant variations in the use of this compensation component, depending on the business type and revenue group. For example, while stock awards constitute 47.3 percent and 45.8 percent of total CEO pay, respectively, in energy and telecommunications companies, the typical healthcare company grants only 26.4 percent of its chief executive compensation in the form of stock awards. Smaller companies with annual revenue under $100 million offer only 12.6 percent of their total CEO compensation in equity awards, compared to the 42.6 percent found among companies with annual revenue of more than $50 billion.

CEOs in the media and entertainment business dominate the top 25 highest-paid list, which includes only two women Of the top 25 highest-paid CEOs, eight are from the media and entertainment industry. Peer pressure and comparisons with the phenomenal earnings of top talent in the industry (TV anchors, musicians, actors, and writers, among others) help explain these findings, which are consistent with observations from previous years. The ownership structure of media companies, which are frequently controlled by a large blockholder that influences board decisions, may also be a driving factor of levels of pay seen in the sector. David M. Zaslav of Discovery Communications ranked first on the 2014 list—reporting total compensation of $156.1 million, up 368 percent from the $33 million in 2013. Coming in a distant second is Mario J. Gabelli of investment advisory Gamco Investors with total 2014 earnings of $88.5 million.

The second most-represented business sector in the 2014’s list of top earners is information technology, with Satya Nadella of Microsoft ranking first among peers ($84.3 million), followed by Larry Ellison of Oracle ($67.3 million), Steve Mollenkopf of Qualcomm ($60.7 million), and Marissa Mayer of Yahoo ($42.1 million). Mayer was also the highest-paid female CEO among U.S. public companies in 2014 (up 69 percent from $24.9 million in 2013) and one of the only two women who made the list—the other being United Therapeutics’ founder Martine Rothblatt ($33.2 million).

Most CEOs on the top 25 list are not from large companies; in some cases, CEOs made the list despite their company’s faltering stock performance CEOs on the top 25 list include companies with annual revenues ranging from $399 million to $86.5 billion. However, the Russell 3000 sample examined for the purpose of this research includes 42 large companies with annual revenue of $50 billion or higher, and only one of them (Microsoft) appeared on the list of the best-paid CEOs in 2014. Instead, most of these companies (14, more specifically) have less than $5 billion in annual revenue and five of them have revenues of less than $1 billion. Several of the smaller companies on the list received among the largest percentage increases.

Eight chief executives appeared on the top list despite negative one-year total shareholder return (TSR) generated by their company. The company suffered a negative one-year TSR of 20 or higher in three of those cases: David Zaslav of Discovery Communication, Joseph Brown of MBIA Inc, and Gary Loveman of Caesars Entertainment. Nonetheless, each of those CEOs saw their total compensation multiply in 2014 (+368 percent, +730 percent, and +328 percent, respectively). There is only one instance on the list (MBIA Inc) in which the company also reported a three-year negative TSR (-6.3). The best performers on the list for one-year TSR were Helen of Troy (+76.1) and Vertex Pharmaceuticals Inc (+59.9). Interestingly, Gerald J. Rubin of Helen of Troy received $31.3 million in total compensation last year, a 25 percent decline from the amount earned in 2013.

In most cases, top earners reported a compensation increase from the previous year, and nine were among the best-paid U.S. CEOs for three years in a row Only four CEOs on the list received lower total pay in 2014 than in 2013. One of them (Leslie Moonves) serves as the chief executive of a company (CBS Corp) that registered a -12.4 TSR in 2014. On the other hand, seven CEOs on the list saw their total compensation double or further multiply from 2013 levels, with one CEO (Greg Maffei of Liberty Media) reporting a tenfold increase (from $3.6 million to $41.4 million) and another (Joe Brown of MBIA) disclosing a 730 percent increase (from $5.3 million to $43.6 million). Twelve individuals on the top 25 list of highest paid CEOs made the same list in 2013, while 10 of these 12 (Philippe Dauman of Viacom, Bob Iger of Walt Disney, and Leonard Schleifer of Regeneron Pharmaceuticals, in addition to Ms. Mayer and Messrs. Zaslav, Gabelli, Ellison, Moonves, Brown and Maffei) were among the highest paid even in 2012.

The total compensation of other senior executives also continues to rise, even though base salary has more weight in their compensation mix The median Russell 3000 named executive officer (NEO), excluding the CEO, earned $1,460,000 in 2014, resulting in one- and five-year increases of, respectively, 12.9 percent and 27 percent—rates that are remarkably similar to those observed for chief executives. However, median 2014 earnings for an S&P 500 NEO were $3,631,000, less than a third of what the median CEO of companies in the index took home in the same year.

Base salary represents a larger part of total NEO compensation as compared to that of a chief executive. More precisely, the base salary of a Russell 3000 executive named in disclosure documents constituted 32 percent of total compensation, compared to the 23.8 percent weight found in the CEO compensation mix analysis. Important variations are seen across company sizes, where base salary ranges from 36.5 percent of the total (for companies with annual revenue under $100 million) to 11.9 percent ($50 billion and over). This finding indicates that, not unlike the trend detected among CEOs, larger companies are increasing their focus on incentive plans for NEOs, including annual bonus, stock awards, and stock options. The incentive (or leverage) multiple (i.e., the sum of annual bonus, stock awards, and stock options divided by base salary) for the smallest revenue group is 1.51, compared to 6.25 of the largest revenue group.

More and more companies have been introducing cash flow as a performance metric in their STI design, while some type of income-related measures continue to be found in almost all such plans Cash-flow metrics of performance are based on the evaluation of a company’s streams of cash flow and include net present value (NPV), return on investment (ROI), and internal rate of return (IRR). In 2014, 43 percent of companies reported using cash flow as a measure of performance in their nondiscretionary short-term incentive (STI) plans. The figure represents a substantial increase from the level found in 2013 and 2010 (33 and 28 percent, respectively), and denotes the only significant change in the array of used metrics revealed by the five-year STI plan analysis. The income-based STI metrics (such as earnings per share (EPS), net income, operating income, EBITDA, or cost-reductions) remain the most commonly adopted; in 2014, as much as 93 percent of companies in the examined sample disclosed the use of such performance measures, a percentage comparable to prior years. Despite its widespread use in LTI plans, total shareholder return continues to be seen only occasionally in STI plans; the industry analysis shows that its STI use is concentrated in the energy industry (about 12 percent of companies).

After a steady increase from 2011 to 2013, the use of capital efficiency measures in LTI plans declined in 2014 The majority of the companies in the study set long-term incentives based on income-related measures (57 percent) and total shareholder return (54 percent). Capital efficiency ratios (where output is divided by capital expenditures to assess the quality of the company’s receivables) consistently rank third in terms of prevalence in LTI plans. However, after a steady increase in the use of such ratios from 2010 (41 percent) to 2013 (44 percent), their adoption rate dropped in 2014 to 37 percent. Common types of capital efficiency metrics are return on capital employed (ROCE) and return on invested capital (ROIC). However, some companies may choose to look at the length of collection periods, the ratio of sales to inventory (or “turns” in inventory), the ratio of sales to net working capital (i.e., the annual turnover of net working capital in relation to net sales), or the ratio of account payables to sales (i.e., how the company pays its suppliers in relation to the sales volume being transacted). Achieving efficient inventory turnover rates is particularly important for the purpose of forecasting and managing large manufacturing businesses. In fact, 50 percent of materials companies—the highest share in the industry analysis—and 35 percent of industrials companies continue to report using capital efficiency as an LTI performance metric.

Despite growing concern about its application, TSR continues to be a widely used LTI performance measure, though its weighting has declined Despite the extensive recent discussion about the disadvantages of using total shareholder return as a long-term incentive (regarding lack of line of sight, complicated accounting treatment, and lack of focus on core operations), it continues to be consistently included in the LTI plans of 54 percent of companies. Compensation committees find it difficult to overlook this measure for gauging corporate performance, as it still takes center stage in the methodologies followed by proxy advisory firms to gauge corporate performance. The adoption of TSR in an LTI strategy may therefore reflect the board’s desire to minimize the “red flags” raised by these groups. However, companies are moving away from LTI plans based solely on TSR. In 2011, 47 percent of companies had plans with TSR weighted at 100 percent. This has decreased to just 31 percent of companies in 2014. Alternatively, the number of companies weighting TSR at less than 25 percent has increased from 5 percent in 2011 to 16 percent in 2014.

The share of companies using a single metric in their incentive plans continues to drop The number of performance measures has increased steadily over the past five years in both LTI and STI plans. This is due to the realization that placing too much emphasis on one measure can lead to manipulations or unintended incentives—think of the use of TSR and the growing recourse to share buybacks to boost equity prices that have been documented in the last decade. The transition to this new approach to plan design has been quite pronounced in long-term incentive plans, where companies using a single LTI measure comprised 41 percent of the sample in 2010 and were down to just 20 percent in 2014. However, while the largest concentration of LTI plans is found in the two-metric category (42 percent of companies), 45 percent of STI plans rely on a combination of four or more metrics, and as much as 28 percent of companies use six or more metrics.

In designing LTI awards and combining two or more performance metrics, companies tend to prefer a balanced approach that incentivizes stock appreciation, corporate results and retention Since 2011, approximately 30 percent of companies have consistently used all three types of LTI awards: appreciation awards (which include stock options and SARs), performance-based awards (including performance shares, performance restricted stock, performance or premium stock options, and long-term incentive cash) and restricted stock. This “balanced” approach has remained popular because it allows upsides for an increase in stock price (via the appreciation awards), corporate performance (via the performance-based award), and retention (via the restricted stock award). A close second is the tandem use of appreciation awards and performance-based awards: 27 percent of companies have reported opting for this solution in their 2014 disclosure. However, the most notable finding from the five-year analysis is the two-fold increase (from 11 percent to 23 percent) in the percentage of organizations that, in the pursuit of closer alignment between pay and performance, chose to combine in their LTI plan restricted stock awards (which provide certainty) and performance-based awards (which do not). This percentage now rivals companies pairing appreciation awards with performance-based awards (27 percent).

While single-focus awards have fallen out of favor, stock options are mixed with other compensation vehicles In response to pressure from shareholders and proxy advisors, the use of single-focus awards such as 100 percent stock options or 100 percent restricted stock (or the combination of stock options and restricted stock) has dwindled over the last few years. In 2011, 19 percent of companies were using one of these three LTI mix types. In 2014, the aggregate percentage dropped to 6 percent. The LTI mix has stabilized in 2014, with performance-based awards making up over half of the total award, stock options (appreciation awards) approximately one-quarter, and time-based restricted stock/restricted stock units approximately one-fifth. The war on stock options appears to have been won, with use decreasing from 34 percent in 2010 to approximately one-quarter of the total award in 2014. At this point, no more companies report using only stock options (or stock appreciation rights); instead, when used, stock options tend to be paired with performance shares/units.

In their short-term incentive plans, companies set tighter performance ranges for EPS and income-related measures than for capital efficiency measures The most prevalent threshold seen in the short-term incentive plans examined for the purposes of the study is 90 percent or greater of target performance. The most prevalent maximum is 110 percent or lower. However, significant variation can be found in the spread between threshold and maximum, depending on the financial measure being used and whether the performance goal is expressed as a “level” or a percent change. For example, when expressed as a level, an EPS goal is most often set in a much narrower band than, say, a capital efficiency measure like ROIC or a percent change goal for EPS or income. Fifty-two percent of EPS measures were found to have a threshold value of 90 percent of target or higher and 76 percent of maximum EPS values are 110 percent of target or lower. In addition, 89 percent or more of EPS and income level thresholds were set to at least 70 percent of target, while at least 89 percent of EPS and income-level performance caps were set at 130 percent or lower. Conversely, capital efficiency measures had 50 percent of threshold goals equal to 90 percent or more of target, while only 50 percent had caps of 110 percent of target or lower.

The majority of companies used 200 percent of target as the maximum payout percentage for their STIPs, while the share of companies that set their maximum above 200 has decreased Twenty-two percent of companies used a payout range (threshold to maximum) of 0 percent to 200 percent for their STIP, which is relatively consistent with previous years. The next most common payout ranges were 50 percent to 200 percent (16 percent) and 50 percent to 150 percent (7 percent). The remaining companies (55 percent) used a variety of other ranges, including small ranges such as 25 percent to 75 percent. STIP threshold payout percentages have drifted upward in recent years, as seen in the decrease in the thresholds below 50 percent, from 78 percent in 2012 to 71 percent in 2013 and 73 percent in 2014. However, a 0 percent payout threshold remained the most prevalent, at 38 percent.

Maximum payout percentages have converged to 200 percent of target, as reported by 55 percent of the studied companies. Among those not using 200 percent as the maximum, the share of companies setting the maximum below 200 percent has grown from 20 percent in 2010 to 25 percent in 2014. Vice versa, in 2010, 27 percent of the sample of companies was choosing a maximum above 200 percent of target; that percentage was down to 20 in 2014.


[1] S&P 500 Earnings Intellect. Trend Analysis from Global Markets Intelligence, S&P Capital IQ, McGraw Hill Financial, July 1, 2015, p. 2.
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