Executive compensation programs are constantly evolving. Meridian’s 2014 Trends and Developments in Executive Compensation Survey covers responses from approximately 125 major companies across a diverse range of industries. This survey and its results are intended to provide an overview of the current landscape and direction companies are moving when it comes to executive compensation and corporate governance practices.

Highlights and key findings of the survey include:

Pay for Performance

Companies are going to greater lengths to evaluate and demonstrate a strong relationship between executive pay and performance, as shareholders increasingly focus on this important issue.

Say on Pay

Expectations for strong shareholder support on Say on Pay remain high as 96% of companies expect shareholder support above 70% in 2014, typically in the mid to high 90’s.

2014 Merit Increase Budgets

Merit increases remained relatively modest (median of 3%) for both executives and non-executives.

Annual Incentives

Companies are setting more rigorous goals in terms of financial targets and the level of performance required to achieve threshold and maximum payouts.

Long-Term Incentives (LTIs)

Most companies are using two LTI vehicles although three vehicles remain common as well, particularly at the officer level. Long-term performance plans now make up 53% of total LTI award values, with stock options down to only 18%.

Background Information

Participating Organizations

The survey includes responses from 123 companies. These organizations are listed, by primary GICS sector, in the Appendix. Financial highlights for the participating organizations are presented in the table below.

FYE Revenues (Millions) Market Value (Millions) Enterprise Value (Millions) Number of Employees
25th Percentile $1,645 $2,047 $2,894 3,363
Median $3,950 $6,201 $7,836 8,000
75th Percentile $8,803 $17,249 $23,834 19,350

Source: Standard & Poor’s Compustat Database

Trailing four-quarter revenues were used for companies that have not reported fiscal year-end 2013 figures. Market value and enterprise value are effective as of December 31, 2013.

Performance Summary of Participants

Operating Margin EPS Growth 1-Year TSR
25th Percentile 7% -13% 18%
Median 13% 10% 39%
75th Percentile 19% 35% 57%

Pay for Performance

In 2014, 68% of responding companies indicated they have recently evaluated the relationship between pay and performance. There are several approaches to how these analyses are conducted; this diversity gives companies the latitude to determine (i) who they compare against (e.g., their own history or an external benchmark), (ii) what timeframe of pay and performance is covered and (iii) how “pay” is defined. Although variations exist, there are a few common themes.

A clear majority of companies compare pay and performance against an external benchmark such as a custom benchmarking group or an Institutional Shareholder Services (ISS) defined peer group. Some use multiple approaches, which results in a sum over 100% in the table below.

Absolute Comparison Relative to Benchmarking Peer Group Relative to ISS Modeled Peer Group Relative to Broad Index
Prevalence 23% 62% 35% 11%

The most common (43%) time frame over which to measure pay and performance was 3 years, though 1-year periods were also common. These time frames coincide with the typical performance periods for short-term and long-term incentive plans. Using a 3-year relative period allows companies to understand the relationship between changes in pay and changes in performance and how those year-over-year relationships stack up against an external benchmark.

1-Year 2-Year 3-Year 5-Year Other
Prevalence 32% 9% 43% 12% 5%

Of those companies conducting pay-for-performance analyses, the most common approach (49%) for measuring pay was to include base salary, actual bonus paid and grant-date value of LTIs; this is a simplified approach as it does not necessarily indicate how long-term payouts correlate with performance. In 2014, nearly 40% (compared to 27% in 2013) of companies revalued LTI grants at the end of the performance period to understand how the value of “realized” or “realizable” pay aligns with historical performance.

Say on Pay

Expected Level of Support for Say on Pay

Companies expect, and continue to receive, very strong levels of support on Say on Pay votes. Since 2011, the passage rate for Russell 3000 companies has been over 97% each year. In 2014, 73% of the companies sampled expect to receive above 90% support on their Say on Pay vote.

Steps Taken to Prepare for 2014 Say on Pay Vote

Despite the high levels of support in recent years, companies continue to be proactive in engaging their shareholder base by providing additional context to their pay programs. Several companies engaged directly with key institutional shareholders, while others made significant enhancements to their proxy CD&A’s to “tell their story.” In addition, companies that changed key components of their executive compensation programs in response to low levels of shareholder support often noted how and why their programs changed in the following year’s proxy filing.

Prevalence
Engage institutional shareholders directly 64%
Enhanced CD&A (e.g., charts, layout, and exhibits) 62%
Change some significant aspect of the executive compensation program in response to 2013 Say on Pay response 25%
Ask proxy solicitor to help with major shareholder outreach 18%

Note: Total exceeds 100% as some companies use multiple approaches.

Steps Taken to Prepare for 2014 ISS Evaluation

ISS continues to wield significant influence over Say on Pay vote results. Early returns from the 2014 proxy season indicate that an “Against” recommendation from ISS results in, on average, a 20%-30% decrease in shareholder support. In light of this, 70% of companies had an outside consultant replicate the ISS pay-for-performance analysis. ISS did make a slight change to its three-part quantitative pay-for-performance analysis for the 2014 proxy season, but the change did not have a material impact on a majority of companies. (For additional detail on the change, see Meridian’s client update released on November 26, 2013, available at www.meridiancp.com)

Prevalence
ISS Tests Modeled by Outside Consultant 71%
Replicated ISS Tests Internally 22%
Paid ISS Fee for Preliminary Test Results 20%
ISS Tests Replicated by Proxy Solicitor 6%
No Specific Work Done 23%
Shareholder Base Does Not Follow ISS 4%

Note: Total exceeds 100% as some companies use multiple approaches.

Early Results on 2014 Say on Pay Votes

Early returns from Say on Pay votes through April 10, 2014 indicate continued strong levels of shareholder support. To date, only one company has failed to receive a majority support for its Say on Pay proposal. Among the 191 companies that have reported vote results, the average level of support was 93.8% and the median level of support was 96.6%.

2014 Say on Pay Vote Result (n=191)
<50% 50% to 70% 70% to 90% >90%
% of Total 0.52% 2.62% 13.09% 83.77%

2014 Merit Increase Budgets

Merit Budget Increases for Executives

2014 merit budget increases for executives at most companies are similar to last year at approximately 3%, a shade above U.S. inflation rates; this continues a trend of merit increases between 2.5% and 3.5%.

Merit Budget Increases for Salaried Non-Exempt

Similar to recent trends for executives, approximately three-quarters of companies increased base salaries for salaried employees between 2.5% and 3.5%. Only 7% of responding companies increased salaries more than 4.0% for this group.

2014 Merit Budget Increase Range Increase Range Prevalence Executives Prevalence Salaried Non-Exempt
0% (no merit increase for 2014) 10% 3%
< 2.0% 1% 1%
2.0% – 2.49% 7% 8%
2.5% – 2.99% 15% 27%
3.0% – 3.49% 45% 48%
3.5% – 3.99% 2% 2%
4.0% – 4.49% 4% 1%
4.5% – 5% 3% 5%
> 5.0% 1% 1%
No Fixed Budget for 2014 12% 4%

Annual Incentives

2014 Annual Incentive Payouts for 2013 Performance

The median bonus paid for 2013 performance was between 95% and 105% of target. Approximately 56% of responding companies indicated that their annual incentive payouts for 2013 performance were at or above target. Of the companies that paid below target, a majority were only slightly below target (i.e., 76%-94% of target).

Use of Discretion in Annual Incentive Plan Payouts

Approximately one-quarter of sampled companies used discretion to adjust annual incentive results for extraordinary, unusual or unplanned events (separate from traditional “negative” discretion used for IRC Section 162(m) purposes). Slightly more companies adjusted results upward (15%) than downward (9%). Examples of why companies adjusted results include macroeconomic impact, acquisitions and divestitures, and poor shareholder returns.

Number of Annual Incentive Performance Metrics

Companies continue to use multiple financial performance metrics in determining annual incentive payouts.

Types of Corporate Performance Metrics

The chart below details the prevalence of performance metrics used by companies for determining annual incentive payouts. Profit measures (e.g., operating income and EPS) remain the most common. Many metrics are industry specific, and some are unique to individual companies.

Plan Design—Payout Opportunity

A majority of respondents (62%) provide a maximum payout opportunity of 200% of target under their annual incentive plan. While bank regulators tend to take exception to payout opportunities over 150%, a maximum payout of 200% of target is the norm in general industry.

The range of payouts for threshold performance tends to vary much more across companies. Fifty-six percent (56%) of responding companies set the threshold payout for the annual incentive plan below 50% of target. Note that respondents that indicated the threshold was zero are captured in the “Less than 25% of target” category.

Primary Earnings Measures

Almost three-quarters of companies (72%) set their annual incentive performance goals higher in 2014 than in 2013, indicating increased expectations as the broader economy continues its slow recovery.

2014 Primary Earnings-Related Goal Compared to 2013 Goals
Lower than 2013 goal 16%
Same as 2013 goal 12%
Higher than 2013 goal by 5% or less 24%
Higher than 2013 goal by more than 5% 48%

In addition, 67% of responding companies set their primary earnings-related goals above last year’s results. Higher expectations coupled with increased confidence in goal setting has led companies to put more rigor into their annual plans and how they set goals.

2014 Primary Earnings-Related Goal Compared to 2013 Results
All goals are at or above last year’s actual results 67%
Threshold goal is below last year’s actual results 14%
Target goal is below last year’s actual results 15%
Maximum goal is below last year’s actual results 4%

Annual budget/plan and historical results are the two most commonly reported factors evaluated when setting annual goals.

Factors Considered in Annual Goal-Setting Process
Year-end plan/budget 93%
Historical performance 56%
External guidance 28%
Historical industry/peer performance 24%
Analyst expectations 22%

Earnings Performance Required to Earn Threshold and Maximum Payout

Companies are setting more rigorous goals, both at threshold and maximum. Approximately one-quarter (26%) of companies set the threshold level of performance for a threshold payout between 90% and 94% of target. Nearly 30% of responding companies required performance at 120% of target in order to earn a maximum payout. The table below details the earnings-related performance levels required to earn a threshold and maximum payout. Note that other metrics may use different scales to determine payouts (e.g., revenue goals are generally set within a tighter range relative to target).

Threshold Maximum
% of Target 2013 2014 % of Target 2013 2014
Under 60% 13% 12% 100% – 104% 6% 4%
60% – 69% 5% 4% 105% – 109% 21% 19%
70% – 79% 10% 11% 110% – 114% 19% 26%
80% – 84% 17% 21% 115% – 120% 23% 21%
85% – 89% 11% 12% Above 120% 32% 29%
90% – 94% 30% 26%
95% – 99% 13% 15%

Long-Term Incentives

LTI Target Values

For a majority of companies, 2014 LTI grants were largely in line with grant sizes in 2013. Among the 36% of companies that increased LTI values, the average increase was approximately 10% year over year.

Nearly 60% of companies set LTI grant sizes using a fixed dollar approach compared to 30% of companies that set LTI grant sizes as a multiple of base salary (e.g., 150% of base). Only 4% of sampled companies determine annual LTI grant sizes using a fixed number of shares.

Methodology for Determining LTI Grant Values

Companies use a variety of methods to determine grant sizes. We asked companies the methodology they use when valuing LTI awards for purposes of grant sizing; the tables below detail the findings.

LTI Vehicle: Stock Option/SARs

Method for Determining Grant Size Prevalence
Same as accounting cost (i.e., ASC Topic 718) 62%
Hypothetical value provided by third-party consultant 24%
Flat percent of stock price (e.g., 25%) 14%

LTI Vehicle: Performance-Based Share/Unit Awards

Method for Determining Grant Size Prevalence
100% of stock price on grant date 77%
Same as the accounting cost which is greater than 100% of stock price 6%
Same as the accounting cost which is less than 100% of stock price 2%
Hypothetical value provided by a third-party consultant 6%
Other flat percent of stock price (e.g., 90%) 9%

LTI Vehicle: Performance Cash

Method for Determining Grant Size Prevalence
100% of targeted value 84%
Hypothetical value provided by a third-party consultant 10%
Same as the accounting cost which is less than 100% of stock price 6%

LTI Vehicle: Time-Based Restricted Stock/Restricted Stock Units (RSUs)

Method for Determining Grant Size Prevalence
100% of stock price on grant date 88%
Hypothetical value provided by third-party consultant 5%
Other flat percent of stock price (e.g., 90%) 5%
Same as the accounting cost which is less than 100% of stock price 2%

Key Factors for Determining LTI Grants

When determining LTI grants for senior-most executives, approximately 74% consider market data (e.g., proxy or survey data) as a primary factor, while internal equity and prior year grant value are also key additional factors.

Primary Factor Additional Factor Not a Factor
Competitive Market Data 74% 23% 3%
Internal Equity (e.g., grouping by level) 37% 57% 6%
Individual Performance 30% 52% 18%
Prior year grant size in number of shares 4% 15% 81%
Prior year grant size in dollars 16% 54% 30%
Share pool dilution 11% 39% 50%
Company performance 24% 51% 25%

LTI Vehicles Used

Eighty-four percent (84%) of sampled companies use two or three LTI vehicles for senior executives. In Meridian’s experiences, it is most common to grant just one vehicle below the senior executive level, most often restricted stock or RSUs.

Performance-based stock/unit awards continue to be the most prevalent LTI vehicle. The table below details the prevalence and mix of each vehicle grouping. For example, the prevalence column represents what percentage of responding companies grant that particular mix of LTI vehicles. The percentage listed under each vehicle heading represents the weighting of that vehicle of total LTI.

Prevalence and Weights of LTI Vehicles

Weight of Vehicle in Total LTI Value
Prevalence PerformanceAwards Stock Options Restricted Stock
Performance Awards, Stock Options and Restricted Stock 32% 41% 32% 27%
Performance Awards and Stock Options 7% 42% 58%
Performance Awards and Restricted Stock 39% 60% 40%
Stock Options and Restricted Stock 5% 57% 43%
Performance Awards only 14% 100%
Stock Options only 1% 100%
Restricted Stock only 3% 100%
Overall (averages) 100% 53% 18% 29%

Note: Performance awards include performance shares, performance units and long-term cash awards.

LTI Mix

There was no significant change in the average LTI mix on a dollar-weighted basis. Long-term performance plans continue to comprise a majority of long-term value granted to executives.

Time-Based Full-Value Award Details

While time-based full-value awards continue to comprise a meaningful portion of total LTI values for senior executives, many companies are choosing to grant share-based units instead of actual shares. However, shares clearly remain the preferred medium of payout, as only 11% of companies actually deliver the vested payout in cash. Also, of those companies awarding time-based RSUs, 64% reported paying dividend equivalents.

Performance-Based Full-Value Award Details

Performance shares are the preferred approach when granting long-term performance awards (89%).

Note: Figures do not sum to 100% because some companies grant multiple types of performance awards

The grant types are defined as: Performance Shares—a performance-based award with the same value as a share of company stock that provides for a potential range of payout depending on achievement against goals; Performance Units—a performance-based award that assigns a notional value to each unit that is not related to the value of a share of company common stock and provides for a potential range of payouts and is typically paid out in cash; Performance-Based Restricted Stock/Units—a performance-contingent equity award with no upside in the number of shares that can be earned.

Eligibility for Long-Term Performance Plan Awards

Eligibility in long-term performance plans is consistent with the 2013 results. A majority of companies (61%) grant long-term performance awards to the “management” group. Granting long-term performance awards below the management group (e.g., to all long-term incentive eligible employees) is not a common practice in part due to line-of-sight and a perceived inability for those participants to drive results.

Percent Eligible
CEO Only 1%
Named Executive Officers Only 4%
Section 16 Executives Officers Only 14%
Management Group 61%
All Long-Term Incentive Eligible Employees (Broader than management group) 20%

Long-Term Performance Period Length

A 3-year performance period continues to be the most common length in long-term performance plans. A majority of companies using a 3-year period set cumulative goals once at the beginning of the performance period. Companies that struggle with long-term goal setting may prefer to use a 3-year performance period in which goals are set annually, or use a relative TSR plan where the percentile goals do not change from one year to the next.

Two-year performance plans are a minority practice with only 4% of responding companies indicating they use a 2-year performance period.

Performance Period Prevalence
1 year 10%
2 years; goals set at beginning of performance period 3%
3 years; goals set at beginning of performance period

  • Relative TSR plans using percentiles
  • Other measures, primarily financial
63%
48%
15%
2 years; goals set annually 1%
3 years; goals set annually 14%
Other 9%

Payout Opportunities

Approximately three-quarters (76%) of performance plans have a maximum payout opportunity equal to 200% of target; companies are shifting away from payout opportunities above 200% of target or awards that are uncapped (7% above 200% or uncapped in 2014 compared with 12% above 200% or uncapped in 2013). Threshold payout opportunities tend to vary considerably; 68% of companies set threshold between 25% and 75% of target.

Perquisites and Other Executive Benefits

Non-business-related perquisites continue to decrease across the broader marketplace. Meridian has seen a continued trend in the decline of new perquisites. Often, legacy perquisite programs are continued for existing participants at the time of the change but decline as executives retire. Other times, companies eliminate perquisites programs altogether. Annual physicals and financial/tax planning remain the most common perquisites offered to executives. Consistent with prior years, the company plane is most often allowed for personal use by the CEO only.

Perquisite CEO At Least One Legacy NEO New NEOs
Company plane for personal use 38% 19% 14%
Excise tax gross-ups (in CIC) 16% 18% 1%
Company car/lease/allowance 27% 31% 22%
Flexible perquisite allowance 10% 8% 9%
Financial/Tax planning 42% 41% 37%
Club memberships 19% 14% 8%
Annual physical 50% 46% 45%
Matching Charitable Gifts 32% 31% 30%
Home Security 13% 7% 4%

Please email Jerrold Rosema (jrosema@meridiancp.com) or call 847-235-3618 with any questions or comments.

Appendix: Participating Companies

Consumer Discretionary

  • American Axle & Manufacturing Holdings, Inc.
  • Aaron’s, Inc.
  • BorgWarner Inc.
  • Brinker International, Inc.
  • Brown Shoe Company Inc.
  • Build-A-Bear Workshop, Inc.
  • Gannett Company, Inc.
  • Gurwitch Products
  • Hallmark Cards
  • Harley-Davidson Inc.
  • Interval Leisure Group
  • Leggett & Platt. Inc.
  • Signet Jewelers Limited
  • Tenneco Inc.
  • The Bon-Ton Stores, Inc.
  • Vera Bradley
  • Yum! Brands, Inc.

Consumer Staples

  • Beam Inc.
  • Coca-Cola Enterprises
  • Energizer Holdings, Inc.
  • Flowers Foods Inc.
  • Ingredion Incorporated
  • John B Sanfilippo & Son, Inc.
  • Kraft Foods Inc.
  • Mead Johnson Nutrition
  • Mondelēz International, Inc.
  • Reynolds American, Inc.
  • Roundy’s, Inc.
  • The Procter & Gamble Company
  • The WhiteWave Foods Company

Energy

  • Alpha Natural Resources, Inc.
  • Apache Corporation
  • Arch Coal, Inc.
  • Comstock Resources, Inc.
  • Denbury Resources, Inc.
  • Devon Energy Corporation
  • EnCana Corporation
  • EnLink Midstream Partners LP
  • FMC Technologies, Inc.
  • Marathon Oil Corporation
  • McDermott International, Inc.
  • ONEOK, Inc.
  • Phillips 66 Company
  • SM Energy Company
  • Southwestern Energy Company
  • Suncor Energy
  • WPX Energy, Inc.
  • Teekay Corporation
  • Tidewater, Inc.

Financials

  • Banco Popular
  • Discover Financial Services LLC
  • First Niagara Financial Group
  • Flushing Financial Corporation
  • Fox Chase Bancorp, Inc.
  • Heritage Oaks Bancorp
  • Independent Bank Corp
  • LPL Financial Holdings Inc.
  • MetLife, Inc.
  • Moody’s Corporation
  • NASDAQ OMX Group Inc.
  • PlainsCapital Corp
  • PNC Financial Services Group Inc.
  • Popular, Inc. (Banco Popular)
  • XL Group plc

Health Care

  • Abbott Laboratories
  • Aetna, Inc.
  • Cardinal Health, Inc.
  • Medtronic, Inc.
  • Perrigo Company plc
  • Vertex Pharmaceuticals Inc.

Industrials

  • Allegion plc
  • Andersen Corporation
  • Avis Budget Group, Inc.
  • Barnes Group, Inc.
  • Brady Corporation
  • Briggs & Stratton
  • Caterpillar Inc.
  • Chicago Bridge & Iron Company
  • Delta Air Lines, Inc.
  • Dun & Bradstreet, Inc.
  • Eaton Corporation plc
  • Fortune Brands Home & Security
  • Franklin Electric Co., Inc.
  • Herman Miller, Inc.
  • IHS Inc.
  • JB Hunt Transport Services, Inc.
  • JBT Corporation
  • Lockheed Martin Corporation
  • Milliken & Company
  • MRC Global Inc.
  • Mueller Water Products, Inc.
  • Nielsen Holdings N.V.
  • Quad/Graphics Inc.
  • Sparton Corporation
  • The Boeing Company
  • TriMas Corporation
  • Trinity Industries, Inc.
  • United Stationers Inc.
  • Wabash National Corporation

Information Technology

  • Akamai Technologies, Inc.
  • Cardtronics, Inc.
  • Fiserv Inc.
  • Global Payments Inc.
  • Hewlett-Packard Company

Materials

  • Domtar Corporation
  • FMC Corporation
  • The Valspar Corporation

Telecommunication Services

  • TELUS Corporation
  • Vonage Holdings Corp.

Utilities

  • Ameren Corporation
  • American Electric Power
  • Avista Corporation
  • Calpine Corporation
  • Dynegy Inc.
  • Exelon Corporation
  • FirstEnergy Corp.
  • NiSource Inc.
  • ONE Gas, Inc.
  • Questar Corporation
  • S&C Electric Company
  • The AES Corporation
  • Westar Energy Inc.
  • WGL Holdings, Inc.
  • Xcel Energy Inc.