As detailed in Meridian’s prior Trends and Developments in Executive Compensation Survey (2015 through early 2016), several factors were driving change in the executive compensation landscape in the U.S. These factors included market volatility, turmoil in commodity prices and political pressure for executive compensation reform in the final year of the Obama Administration. Through the balance of 2016 and into early 2017, several of these factors have been at least partially mitigated by increased macroeconomic stability, widespread share price appreciation in U.S. markets and the signaled directional changes under the Trump Administration. In regards to the latter, the status of pending Dodd-Frank mandates (e.g., clawback policies and pay-for-performance disclosure) are at a standstill, potentially reversing the tide in demand for increased corporate disclosure and regulation. In addition, the SEC has signaled a desire to solicit additional feedback on the controversial CEO Pay Ratio disclosure requirements that are due out next spring for calendar-year issuers.
Accordingly, Meridian’s 2017 Trends and Developments in Executive Compensation Survey and its results are intended to provide an overview of the current environment and signal the direction in which companies are moving with respect to executive compensation and corporate governance practices. This survey features responses from 118 companies across a diverse range of industries, covering topics such as annual and long-term incentive plan designs, Say on Pay, the CEO pay ratio, and more.
Highlights and key findings of the survey include:
Say on Pay and CEO Pay Ratio
- Nearly 60% of responding companies indicated that they directly engaged with institutional shareholders and/or proxy advisory firms (e.g., ISS and Glass Lewis) in preparation for their Say on Pay vote.
- Well over one-half of participating companies engaged in shareholder outreach in 2016. Investor Relations led over 60% of these efforts, while the rest were led by a combination of individuals (e.g., Compensation Committee Chair, Head of HR, Corporate Secretary, CEO, CFO, etc.).
- In response to shareholder feedback, approximately one-half of participants have made a change to their annual and/or long-term incentive plans since the adoption of Say on Pay.
- Approximately one-half of participating companies have calculated the preliminary CEO Pay Ratio. Roughly 50% of these ratios fall at or below 150:1, indicating an inflection point near this ratio among survey participants. However, this ratio is highly dependent on company characteristics including global workforce, industry sector and company size.
2017 Merit Increase Budgets
Consistent with recent years, median merit increases for CEOs, executives and non-executives continue to approximate 3%. However, slightly less than half of respondents reported holding CEO base salaries flat for 2017 (approximately 25% for other executives). This indicates that many companies may no longer be providing annual base pay increases to CEOs and, instead, are making more periodic adjustments based on significant market movements or other factors.
- Respondents generally consider multiple factors in the goal-setting process (e.g., approved annual budgets, company and peer historical performance, street guidance, sharing ratios, etc.).
- Nearly two-thirds of survey participants reported that annual incentive payouts for 2016 performance were at or above target levels.
- As a likely indication of a positive economic outlook, approximately one-half of respondents set a 2017 primary earnings-related threshold goal higher than 2016 actual results.
Identical to last year, 46% of survey participants reported that 2017 target long-term incentive grant values approximated 2016 levels, while 43% reported target grant value increases for 2017 and 11% reported target value decreases for 2017. Both for those increasing and those decreasing grant values, the average change was 14%.
Background and Financial Information
The survey includes responses from 118 companies. These organizations are listed in the Appendix. Financial highlights for the participating organizations are presented in the table below.
|FY 2016 Revenue
|Enterprise Value ($ Mn)||Number of Employees|
Source: Standard & Poor’s Compustat Database
Market value and enterprise value are as of December 31, 2016
Performance Summary of Participants
|1-Year TSR||3-Year TSR|
Source: Standard & Poor’s Compustat Database
Operating margin and EPS growth represent FY 2016
TSR as of December 31, 2016
Say on Pay
Say on Pay (SOP) is now in its seventh year of existence. Accordingly, companies have had ample time to develop sound pay program designs and address concerns expressed by shareholders and proxy advisory firms. As such, shareholder support of executive pay programs remains very high, most often with over 90% voting in favor of such proposals.
Steps Taken to Prepare for 2017 Say on Pay Vote
Despite consistently high levels of shareholder support on SOP, a significant number of companies take numerous steps in preparation of the vote. The most prevalent step taken is to directly engage with institutional shareholders and/or proxy advisory firms (i.e., ISS and Glass Lewis). Further, companies continue to improve the quality of their Compensation Discussion and Analysis (CD&A) through the use of executive summaries, tables, charts and graphs. Many of these supplemental disclosures exceed proxy disclosure requirements; thus, they are a useful tool to more effectively communicate overall pay program design and performance alignment to shareholders.
|Steps Taken to Prepare for SOP Vote||Prevalence|
|Engage institutional shareholders directly||60%|
|Engage ISS and/or Glass Lewis directly||46%|
|Materially modifying disclosure and/or adding to the Compensation Discussion and Analysis||43%|
|Changing some significant aspect of the executive compensation program in direct response to 2016 Say on Pay vote outcome||20%|
|No significant steps taken||11%|
Note: Total exceeds 100% as many companies use multiple approaches.
Shareholder Engagement in 2016
Among survey participants, more than half disclosed attempts at shareholder engagement in 2016. Most of these efforts (approximately 60%) were led by Investor Relations personnel, however, the rest were led by a wide variety of individuals. Participant response seems to indicate that company-specific circumstances likely dictate which individuals lead these efforts.
*Includes Corporate Secretary, CEO, CFO, Head of Compensation, as well as Finance and Legal functions
Incentive Plan Design Changes in Response to Shareholder Feedback
To attempt to quantify SOP’s impact on driving change, Meridian asked participants if their organization has made modifications to annual or long-term incentive plan metrics/design in direct response to shareholder feedback. Slightly less than half of participants have made such a change since the adoption of SOP.
CEO Pay Ratio
The SEC adopted the final rule on the CEO Pay Ratio in August of 2015. While still subject to review under the Trump Administration, the initial CEO Pay Ratio is scheduled for the first reporting period beginning on or after January 1, 2017 (i.e., 2018 proxy) and will cover compensation for fiscal year 2017. While the vast majority of companies have not made any voluntary disclosures, approximately 50% of participating companies have calculated a preliminary ratio. As shown below:
- Thirty percent (30%) have a ratio below 100:1.
- One-half of these preliminary ratios fall at or below 150:1, indicating an inflection point near this ratio.
- The companies at the higher end of the range (i.e., greater than 500:1) fall into a few industries: Consumer Discretionary, Consumer Staples and Retail.
|Preliminary Modeling of the Ratio Between CEO Pay and the Pay of the “Median” Employee|
|Up to 100||101 to 150||151 to 200||201 to 250||251 to 300||301 to 350||351 to 400||401 to 450||451 to 500||500 to 1000||> 1,000|
2017 U.S. Merit Increase Budgets
U.S. Merit Budget Increases for CEOs and Other Senior Executives
2017 merit budget increases for CEOs and executives have remained relatively consistent for several years at approximately 3% (slightly above U.S. inflation rates). Merit budgets outside the U.S. vary greatly, often related to local inflationary movements. This continues a long-term trend of merit increases between 2.5% and 3.5%. However, for the second year in a row, a larger portion of participants reported holding CEO and executive base salaries flat (i.e., 0% merit increase) for 2017. This indicates that many companies may no longer be providing annual base pay increases to CEOs and other senior executives and, instead, are making more periodic adjustments based on significant market movements, promotions or other factors.
U.S. Merit Budget Increases for Salaried Non-Exempt Employees
Approximately 55% of responding companies increased base salaries between 2.5% and 3.5% for salaried employees. In contrast to CEO and Executive merit increases, less than 10% of participants reported holding base salaries flat for salaried non-exempt employees.
2017 Merit Budget Increase Range
|Increase Range||Prevalence CEO||Prevalence Executives||Prevalence Salaried Non-Exempt Employees|
|0% (no merit increase for 2017)||45%||27%||9%|
|2.0% – 2.49%||3%||10%||16%|
|2.5% – 2.99%||7%||9%||16%|
|3.0% – 3.49%||14%||22%||41%|
|3.5% – 3.99%||1%||0%||2%|
|4.0% – 4.49%||2%||3%||0%|
|4.5% – 5%||2%||2%||1%|
|No Fixed Budget for 2017||21%||18%||6%|
2017 Annual Incentive Payouts for 2016 Performance
Approximately 65% of responding companies indicated that their annual incentive payouts for 2016 performance were at or above target.
Number of Annual Incentive Performance Metrics
Companies continue to use multiple financial performance metrics in determining annual incentive payouts.
Among those using one performance metric, the vast majority use a profit measure (e.g., operating income, net income, EPS, etc.).
Types of Corporate Performance Metrics for Annual Incentive Plans
The chart below details the prevalence of performance metrics used by companies for determining annual incentive payouts. As expected, profit measures (e.g., operating income, net income, and EPS) remain the most common. Note, many metrics are industry specific, and some are unique to individual companies. In start contrast to long-term incentive plans, the use of either absolute or relative TSR remains very low for annual incentive plans.
Primary Earnings Measures
Similar to last year, a majority of companies (58%) set their annual incentive performance goals higher in 2017 than in 2016, indicating increased expectations as the broader economy stabilizes. For many participants (42%), the performance goal increase was more than 5% higher than 2016 levels.
|2017 Primary Earnings-Related Goal Compared to 2016 Goals|
|Lower than 2016 goal||26%|
|Same as 2016 goal||17%|
|Higher than 2016 goal by 5% or less||16%|
|Higher than 2016 goal by more than 5%||42%|
Also similar to last year, approximately one-half of companies (51%) also set 2017 threshold earnings goals above 2016 actual results (i.e., all 2017 goals – threshold, target, and maximum – are above 2016 actuals).
|2017 Primary Earnings-Related Goal Compared to 2016 Actual Results|
|All goals are at or above last year’s actual results||51%|
|Threshold goal is below last year’s actual results||20%|
|Target goal is below last year’s actual results||24%|
|Maximum goal is below last year’s actual results||5%|
Consistent with prior years, annual budget/plan and historical results are the two most commonly reported factors evaluated when setting annual goals. Sharing ratios are the least prevalent, however, nearly one-fifth of participating companies still consider them when setting annual incentive goals. Note, data on sharing ratios is limited and varies due to a number of company-specific factors, including eligibility levels for annual incentive plans. Nonetheless, an internal understanding of the relationship between the annual incentive plan and how dollars are allocated between executives and shareholders (especially between target and maximum payout levels) is an increasingly important aspect of the annual goal-setting process.
|Factors Considered in Annual Goal-Setting Process|
|Historical company performance||61%|
|Historical industry/peer performance||33%|
Note: Total exceeds 100% as many companies use multiple approaches.
Long-Term Incentive (LTI) Vehicles Used
Consistent with last year, 90% of sampled companies use two or three LTI vehicles for senior executives. However, in Meridian’s experiences, it is most common to grant just one vehicle below the senior executive level, most often restricted stock or restricted stock units (RSUs).
Performance-based stock/unit awards continue to be the most prevalent LTI vehicle for senior executives. In the table below, the prevalence column represents the percentage of responding companies that grant a particular mix of LTI vehicles. The percentages listed under each vehicle heading represent the dollar weighting of that vehicle of the total LTI opportunity. Overall, the average weighting of LTI vehicles for reporting companies in 2017 is consistent with average weightings in 2016 and 2015.
Prevalence and Weights of LTI Vehicles for Executives
|Weight of Vehicle in Total
LTI Value Opportunity
|Stock Options||Restricted Stock|
|3 Vehicles (22% of respondents)|
|Performance awards, stock options and restricted stock||22%||44%||27%||29%|
|2 Vehicles (68% of respondents)|
|Performance awards and restricted stock||55%||58%||—||42%|
|Performance awards and stock options||11%||51%||49%||—|
|Stock options and restricted stock||2%||—||28%||72%|
|1 Vehicle (10% of respondents)|
|Performance awards only||8%||100%||—||—|
|Restricted stock only||0%||—||—||100%|
|Stock options only||2%||—||100%||—|
|Overall (averages) – 2017||100%||56%||13%||31%|
|Overall (averages) – 2016||100%||55%||16%||29%|
Note: Performance awards include performance shares, performance units and long-term cash awards
LTI Target Values
The results below are identical to last year with practice evenly split between equal or greater target LTI values in 2017 compared to 2016.
Interestingly, for both those increasing LTI values and those decreasing LTI values, the percentage change was approximately 14%.
Long-Term Performance Benchmark
Similar to last year, for reporting companies granting performance-based awards, the vast majority (70%) measure performance relative to an external benchmark for some portion of their performance grant. Approximately 90% of these relative plans are measured based on TSR.
|Use an External Benchmark
§ Custom peer group
§ Externally selected peer set (e.g., S&P 500)
|Solely Use Internal (Absolute) Metrics||30%|
Number of Long-Term Incentive Performance Metrics
Similar to annual incentive plans, the vast majority of companies use one or two performance metrics to determine long-term incentive payouts.
Types of Corporate Performance Metrics for Long-Term Performance Plans
Consistent with recent years, TSR remains the most common long-term performance plan metric due to its transparency, alignment with shareholders and because it eliminates the need to set goals each year. When TSR is used, the average weighting within the plan is 73%. Further, approximately half (48%) of companies using TSR as a long-term incentive metric use it as the sole metric within the plan. In addition, some companies are using TSR only as a modifier to results based on other financial metrics (e.g., +/-25%).
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Appendix: Participating Companies
American Axle & Manufacturing Holdings, Inc.
Carriage Services, Inc.
Gannett Co., Inc.
Haverty Furniture Companies, Inc.
Horizon Global Corporation
The Interpublic Group of Companies, Inc.
J.C. Penney Company, Inc.
Leggett & Platt, Incorporated
LGI Homes, Inc.
Magna International Inc.
National Vision, Inc.
Signet Jewelers Limited
West Marine, Inc.
Yum! Brands, Inc.
The Coca-Cola Company
The Procter & Gamble Company
Reynolds American Inc.
US Foods Holding Corp.
Anadarko Petroleum Corporation
Arch Coal, Inc.
Bill Barrett Corporation
California Resources Corporation
Callon Petroleum Company
Cheniere Energy, Inc.
Concho Resources Inc.
Contango Oil & Gas Company
Eclipse Resources Corporation
Enlink Midstream Partners, LP
Frank’s International N.V.
Helix Energy Solutions Group, Inc.
Marathon Oil Corporation
Matrix Service Company
National Oilwell Varco, Inc.
Newfield Exploration Company
Oceaneering International, Inc.
SM Energy Company
Berkshire Bancorp, Inc.
CBOE Holdings, Inc.
CME Group Inc.
Dime Community Bancshares, Inc.
The Hartford Financial Services Group, Inc.
The Hartford Insurance Group, Inc.
Hilltop Holdings Inc.
MB Financial, Inc.
The PNC Financial Services Group, Inc.
Sandy Spring Bancorp, Inc.
State Street Corporation
SVB Financial Group
Synovus Financial Corp.
United Financial Bancorp, Inc.
Wintrust Financial Corporation
XL Group Ltd
Albany Molecular Research Inc.
Baxter International Inc.
Blue Cross Blue Shield of Arizona
Barnes Group Inc.
BlueLinx Holdings Inc.
Briggs & Stratton Corporation
CECO Environmental Corp.
Commercial Vehicle Group, Inc.
Delta Air Lines, Inc.
The Dun & Bradstreet Corporation
Eaton Corporation plc
Fortune Brands Home & Security, Inc.
Franklin Electric Co.
Kansas City Southern
Lockheed Martin Corporation
The Middleby Corporation
MRC Global Inc.
Mueller Water Products, Inc.
Trinity Industries, Inc.
Wabash National Corporation
Akamai Technologies, Inc.
Maxwell Technologies, Inc.
Micron Technology, Inc.
Koppers Holdings Inc.
P.H. Glatfelter Company
Agree Realty Corporation
American Tower Corporation
Crown Castle International Corp.
Vonage Holdings Corp.
The AES Corporation
One Gas, Inc.
Westar Energy, Inc.
Xcel Energy Inc.
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This survey was authored by Mike Rourke of Meridian Compensation Partners, LLC. Questions and comments should be directed to Mr. Rourke at email@example.com or 313-309-2090.