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 2019, numerous factors impacted the U.S. executive compensation landscape. An increased focus on environmental sustainability, diversity and inclusion by institutional investors led boards to contemplate the merits of adding such measures to short- and long- term incentive plans. External criticism of the limited representation of women in leadership positions sparked action on gender pay gap issues. Most recently, the COVID-19 pandemic and associated market volatility created several unique executive compensation challenges for 2020 and beyond.
Meridian’s 2020 Trends and Developments in Executive Compensation Survey provides an overview of the current environment and signals the direction in which companies are moving with respect to executive compensation and corporate governance practices. This survey features responses from well over 100 major companies across a diverse range of industries, covering topics such as annual and long-term incentive plan design, Say on Pay(“SOP”), Environmental, Social and Governance (“ESG”) metrics, gender pay issues, clawback provisions, COVID-19 pay implications and more.
Highlights and key findings of our 2020 survey include:
Say on Pay
- Nearly all respondents (97%) took proactive steps in their compensation programs and/or public disclosures to prepare for their 2020 SOP vote. The most common step taken was to model and forecast proxy advisor (e.g., ISS or Glass Lewis) pay-for-performance tests and related recommendations.
- The prevalence of respondents that have directly engaged ISS or Glass Lewis increased by approximately 15% since 2019. This trend likely corresponds with recent changes made by proxy advisors to their pay-for-performance tests. Also, companies have often previewed program strategies or changes with proxy advisors to anticipate shareholder views.
- If companies reached out to shareholders directly, engagement efforts most often (81%) included the head of Investor Relations, along with other management or board representatives. Participation has depended on specific circumstances.
CEO Pay Ratio
- Over one-half of respondents (58%) do not expect material changes to their CEO pay ratio. Those that do, expect the change will stem primarily from changes in CEO pay levels.
- The majority of respondents do not plan to evaluate or make any near-term 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 (16%) plan to make further changes if/when SEC regulations regarding clawback policies are finalized.
- As of April 2020, the majority of the respondents had not adjusted their pay programs in response to the COVID-19 pandemic. Of respondents making adjustments, the majority had modified, or expected to modify, short-term incentive plan designs. This included reviewing 2020 financial goals and/or adding language to allow for increased Committee discretion at year end to adjust for the impact of the virus. However, most board discussions around the implications of COVID-19 on executive compensation program designs are still in early stages and are, therefore, not captured by this survey.
2020 Merit Increase Budgets
- Consistent with recent years in the U.S., the median salary increases for CEOs, executives and non-executives was approximately 3%. However, 32% of respondents reported holding CEO base salaries flat for 2020 (11% for other executives). This continues a trend of companies no longer providing annual base pay increases to CEOs, but rather making periodic adjustments based on significant market movement, performance or other factors. These trends do not consider recent salary reductions announced by several hundred U.S. companies during the recent COVID-19 pandemic, especially in hard-hit industry sectors.
Gender Pay Gap
- Approximately 60% of respondents have reported taking action to address gender pay gap issues. Over two-thirds of respondents taking action have conducted annual assessments and made remediations, as necessary.
- Due to increased pressure from some shareholders and local and state governmental authorities, as well as other stakeholders, the prevalence of ESG metrics in pay program design has increased for 2020. Approximately 20% of respondents now include ESG performance metrics in their 2020 incentive programs, with the majority adding ESG metrics in their short-term incentive plan.
- A majority of respondents (58%) indicated that their annual incentive payouts for 2019 performance were above target. Respondents generally considered multiple factors in the 2020 goal-setting process (e.g., board-approved annual budgets, company and peer historical performance, “street guidance” and analyst expectations). A slight majority of respondents (53%) set 2020 threshold goals for primary earnings-related measures higher than 2019 actual results. These goals may prove challenging due to the substantial impact of COVID-19. The prevalence of financial performance metrics used by respondents was consistent with prior years.
Long-Term Incentives (LTI)
- Approximately one-half (49%) of respondents granted long-term incentive awards in 2020 with the same targeted value as in 2019. Similar to last year, the vast majority of respondents (78%) used either one or two performance metrics in their long-term performance plans. The use of total shareholder return (“TSR”) as the sole performance metric has declined over the past 4 years from 47% in 2016 to 30% in 2020. Many companies have recently reevaluated how effectively TSR has worked for their situation and how much incentive weight to assign it. Some now instead use relative TSR as a modifier to a financial or operating metric outcome. We expect COVID-19 implications on existing performance plan cycles will be the subject of significant discussions this fall.
For the full report, please download the PDF.
This survey was authored by Katherine Beall of Meridian Compensation Partners, LLC. Questions and comments should be directed to Ms. Beall at email@example.com or 847-235-3626.