FTI Consulting Compensation Study Finds Homebuilders’ Commitment to Pay-for-Performance Continues to Be Strong
September 19 2017 - 7:30AM
FTI Consulting, Inc. (NYSE:FCN) has reported that the structure of
executive compensation programs at publicly traded homebuilders
continues to be predominantly formulaic and contingent on the
achievement of hitting profitability targets. These key findings
were revealed in the firm’s 2017 Homebuilders Annual and Long-Term
Incentive Practices study, which focuses on the pay practices at
the nation’s 20 publicly traded homebuilders.
Conducted by the Executive Compensation & Corporate
Governance practice at FTI Consulting, the study details
compensation structures and provides meaningful insight and
commentary into recent homebuilder compensation market
trends.
Among the key findings, the study revealed that many
homebuilders’ compensation committees and management teams have
worked to balance their compensation structures by incorporating
more financial measures in their annual cash bonus program and
performance shares, generally using a profitability metric plus one
or two additional key measures. In addition, most homebuilders use
two equity vehicles in their Long-Term Incentive (“LTI”) programs
to balance retention by incorporating time-vested shares and
motivation by incorporating performance shares.
“All publicly traded homebuilders received majority shareholder
support on 2017 say-on-pay proposals, which is a testament to the
pay-for-performance alignment in the industry,” said Katie Gaynor,
Co-Leader of the Executive Compensation & Corporate Governance
practice at FTI Consulting. “Stock prices in the homebuilder
industry are up approximately 25 percent in 2017 based on strong
fundamentals and a positive industry outlook overall, which always
lends itself to strong say-on-pay results and less-complicated
discussions in the boardroom around compensation. The challenge is
always designing a compensation program that works not only in an
up market, but one that will also be effective in retaining,
rewarding and motivating key employees during a down market,
something that is inevitable given the cyclical nature of the
homebuilding industry.”
Annual incentive plans (e.g., cash bonus plans) at homebuilders
are continuing the trend of being more formulaic based on two to
four key measures. In 2016, 30 percent of annual incentive plans
incorporated a discretionary or subjective component.
Larry Portal, Co-Leader of the Executive Compensation &
Corporate Governance practice, noted that, “Compensation committees
are more sensitive to the degree to which discretion is appropriate
in annual incentive plans. Setting pre-determined financial
measures, while sometimes difficult to forecast, provides a clear
link to compensation amounts, to which shareholders have reacted
positively. Companies are aiming to balance excessive risk-taking
by using fewer metrics and focusing management on critical business
objectives.”
Additional key findings of the 2017 Homebuilders Annual and
Long-Term Incentive Practices study include:
- 95 percent of homebuilders include a formulaic component as
part of the annual incentive plan, with a pre-tax income or
earnings before interest, taxes, depreciation and amortization
(“EBITDA”) metric being used by all homebuilders with a formulaic
component.
- The majority of homebuilders (75 percent) have clearly stated
target bonus opportunities, with the median target bonus for CEOs
at 150 percent of base salary.
- Performance shares with a three-year performance period are the
most common equity compensation vehicle, followed closely by
time-vested restricted stock.
- While total shareholder return (“TSR”) has been the long-term
performance metric of choice for homebuilders and proxy advisory
firms for many years, operational metrics, particularly a profit
metric such as pre-tax income or earnings per share (“EPS”), are
becoming more prevalent.
About the 2017 Homebuilders Annual and Long-Term
Incentive Practices Study In September 2017, FTI
Consulting reviewed and analyzed compensation-related disclosure in
the 2017 proxy statements for the 20 publicly traded homebuilders.
The study focuses on the design and structure of annual incentive
plans (or cash bonuses) and long-term equity incentives used by
homebuilders based on the most forward-looking information
available.
About FTI ConsultingFTI Consulting, Inc. is a
global business advisory firm dedicated to helping organizations
manage change, mitigate risk and resolve disputes: financial,
legal, operational, political & regulatory, reputational and
transactional. With more than 4,600 employees located in 28
countries, FTI Consulting professionals work closely with clients
to anticipate, illuminate and overcome complex business challenges
and make the most of opportunities. The Company generated $1.81
billion in revenues during fiscal year 2016. For more information,
visit www.fticonsulting.com and connect with us on Twitter
(@FTIConsulting), Facebook and LinkedIn.
FTI Consulting, Inc. 555 12th Street NW
Washington, DC 20004
+1.202.312.9100
Investor Contact: Mollie
Hawkes+1.617.747.1791mollie.hawkes@fticonsulting.com
Media Contact: Nina
Dietrich+1.201.493.8944nina@ninadietrich.com
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