Should Bar Be Lifted on CEO Bonuses? -- WSJ
June 02 2017 - 3:02AM
Dow Jones News
By Theo Francis and Joann S. Lublin
Investors have pressed for years to get companies to tie
executive pay more closely to performance, and boards have
increasingly complied. But now, some investors are questioning just
how high they set the bar.
Median pay for chief executives of S&P 500 companies reached
$11.7 million in 2016, up from $10.8 million a year earlier and a
postrecession high, according to a Wall Street Journal analysis.
Roughly 60% of their pay came from stock and stock-option awards,
most of which are tied to performance targets.
Companies have wide latitude in choosing performance hurdles.
Take FedEx Corp. For more than a decade, the company has used the
same 12.5% target for average earnings-per-share growth as a
threshold for its executives to earn their target long-term
incentive payments -- even as Wall Street analysts have forecast
substantially higher growth at the start of many of those
years.
FedEx has gone on to exceed the target in four of the past five
performance periods and has paid out the maximum cash bonus in
three. Chief Executive Fred Smith was paid $16.8 million last year,
up 21% from a year earlier.
A FedEx spokesman said the target reflects the company's
long-term goal of 10% to 15% annual per-share earnings growth and
serves to reward executives for building long-term shareholder
value.
"It has to be the right measure and the right achievement
level," said Glenn Booraem, who handles corporate governance for
more than $2 trillion of U.S. equity investments at mutual-fund
giant Vanguard Group.
Mr. Booraem said he is concerned some boards set the bar too
low, allowing CEOs to earn "premium payouts in the absence of
compelling performance relative to the market."
Last year about 250 S&P 500 companies paid CEOs cash
incentives above the levels they promised for meeting certain
performance goals, averaging 46% higher, according to data from
Institutional Shareholder Services, the biggest U.S. proxy-advisory
firm. Meanwhile, 150 paid bonuses below the target.
Annual bonuses have long been tied to performance. Stock and
stock-option awards, however, were often awarded at set levels; the
value fluctuated only as share prices subsequently rose or
fell.
Now, the number of shares or options a CEO ultimately receives
is increasingly determined by meeting or missing a variety of
targets, based on anything from stock-price gains and
earnings-per-share thresholds to revenue, safety records and more.
Better performance yields a bigger award. Poor performance can mean
none at all.
For two-thirds of S&P 500 companies, the overall pay CEOs
received over the past three years proved higher than initial
targets, according to an ISS analysis. That is typically because
performance triggers raised the number of shares CEOs received, or
stock gains lifted the value of the original grant. On average,
compensation was 16% higher than the target.
The values companies disclose for CEO equity awards also show
that about one-third of CEOs start the fiscal year expecting to
beat the performance targets that determine the size of those stock
grants, ISS said.
In some cases "the company is setting goals they think the CEO
is going to clear," said John Roe, head of analytics at ISS. "It's
a tip-off to investors."
In March, General Electric Co. modified its bonus program for
top executives to tie pay more closely to specific performance
goals, including the level of cost reductions over the next year.
The company said the changes came out of discussions with activist
investor Trian Fund Management, which had called for more stringent
targets.
In comments to investors last week, CEO Jeff Immelt said the
company's bonus and long-term incentive plan keep executives'
interests aligned with those of shareholders. Last year, Mr. Immelt
received 80% of his projected bonus because the company missed
operating-profit targets. His total pay fell by one-third to $18
million.
Boards must juggle a range of factors in setting performance
targets. Investors and proxy advisers have their preferred
measures, and consultants recommend targets that are challenging
but not impossible. They can evaluate how well they have chosen by
considering the market's reaction, said Ira Kay, managing partner
at consultancy Pay Governance. "If we beat it and our stock goes
down, it was probably not such a hard goal," Mr. Kay said.
United Parcel Service Inc. missed several of its performance
targets last year, including goals for three-year revenue growth
and total shareholder return. As a result, CEO David Abney received
70% of his targeted incentive pay. But the shortfall was more than
made up by two salary increases and a one-time grant of stock and
options. He received $13.7 million in total pay, up 21% from a year
earlier.
A UPS spokesman said Mr. Abney and other top executives received
incentive pay in line with company performance, and the company is
committed to maintaining competitive compensation while tying pay
to performance.
Write to Theo Francis at theo.francis@wsj.com and Joann S.
Lublin at joann.lublin@wsj.com
(END) Dow Jones Newswires
June 02, 2017 02:47 ET (06:47 GMT)
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