In the past year, several factors have driven change in the executive compensation landscape in the U.S. Each year, Meridian identifies key developments regarding how companies respond to these ever changing conditions. (Read last year’s survey here.)
In 2018, numerous factors affected the complexion of the U.S. executive compensation landscape. Share price volatility in the stock market increased with substantial losses in Q4, followed by a strong recovery in Q1 of 2019. Companies experienced tax changes from the Tax Cuts and Jobs Act (“Tax Act”), and were forced to adjust strategies and policies accordingly. 2018 also marked the inaugural year of the CEO pay ratio, requiring additional time and resources for proxy statement disclosure and driving increased external scrutiny of pay programs and pay equity. Recently, highly visible scandals caused reputational harm to large enterprises, leading Boards to reevaluate both the design and rigor of existing clawback policies.
Meridian’s 2019 Trends and Developments in Executive Compensation Survey is 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 144 major companies across a diverse range of industries, covering topics such as annual and long-term incentive plan designs, Say on Pay (“SOP”), the CEO pay ratio, anti-hedging policies, clawback provisions and more.
Highlights and key findings of our 2019 survey include:
Say on Pay
- Nearly all respondents (96%) took steps related to their compensation programs and/or public disclosures to prepare for their 2019 SOP vote. The most common step taken was modeling proxy advisor (e.g., ISS or Glass Lewis) pay-for performance tests and related recommendations.
- The number of respondents that have directly engaged ISS or Glass Lewis has declined since 2017. This trend likely corresponds with the self-acknowledged time constraints of proxy advisors, and thus the difficulty for companies to engage with proxy advisors, especially during proxy season.
- The number of respondents that have materially modified proxy statement disclosure to prepare for the Say on Pay vote has also declined. This decline in new proxy disclosures may suggest prior development of templates for supplemental or volitional disclosures (e.g., executive summaries, compensation committee letters, discussions of shareholder outreach, graphics).
- Investor Relations was involved in 77% of shareholder outreach efforts, while involvement of other parties (e.g., Compensation Committee Chair, CEO, General Counsel, CHRO, CFO) was dependent upon the specific circumstances.
CEO Pay Ratio
- A majority of respondents (65%) do not expect material changes to their CEO pay ratio, and for those that do, they expect the change will stem primarily from changes in CEO pay levels.
- Nearly half (48%) of respondents plan to use the 2018 “median” employee for their 2019 pay ratio calculation.
- As expected, the action most commonly considered in response to the Tax Act was the elimination of structures in annual and long-term incentive plans designed to comply with the requirements of Section 162(m) of the Internal Revenue Code related to the now-repealed performance-based exemption.
- Despite the recently finalized Securities Exchange Commission (“SEC”) rules regarding hedging policy disclosure, most respondents (93%) do not intend to make any updates to their existing hedging policies.
- The majority of respondents do not plan to evaluate or make any changes to their clawback/forfeiture policies despite recent high-profile cases where executive pay was recouped and/or forfeited due to misconduct. A subset of the majority (23%) plan to make further changes if/when SEC regulations regarding clawback policies are finalized.
2019 Merit Increase Budgets
- Consistent with recent years, median merit increases for CEOs, executives and non-executives continue to approximate 3%. However, 34% of respondents reported holding CEO base salaries flat for 2019 (14% for other executives). This continues a trend that a significant number of companies are no longer providing annual base pay increases to CEOs, but rather are making more periodic adjustments based on significant market movements or other factors.
- The slight majority of respondents (56%) indicated that their annual incentive payouts for 2018 performance were above target.
- Respondents generally considered multiple factors in the goal-setting process (e.g., board-approved annual budgets, company and peer historical performance, “street guidance”, analyst expectations).
- As a likely indication of a positive economic outlook, 58% of respondents set 2019 primary earnings-related threshold goals higher than 2018 actual results.
- A modest increase in the use of a cash flow metric was observed over the past several years.
Long-Term Incentives (LTI)
- The majority of respondents (62%) granted long-term incentive awards in 2019 with about the same targeted value as in 2018.
- Similar to last year, the vast majority of respondents (84%) utilized one or two financial metrics in long-term performance plans.
- The use of total shareholder return (“TSR”) as the sole performance metric has declined from 47% in 2016 to 33%. In recent years, many companies have reevaluated the appropriateness of TSR as a metric and the degree of focus that should be assigned to this measure, with some now just using it as a modifier.
For the full report, please download the PDF.
This survey was authored by Tony Meyer of Meridian Compensation Partners, LLC. Questions and comments should be directed to Mr. Meyer at firstname.lastname@example.org or 847-235-3651.