Are CEO Incentive Targets Becoming More Rigorous?


Are CEO Incentive Targets Becoming More Rigorous?

2017-01-25 - 10:39 am

The fraction of CEO cash bonuses that are paying out above-target appears to be on the decline, from 60% of companies in 2010 to 49% of companies in 2015.

Public companies are required by the SEC to disclose the details of their executive pay programs in annual filings. Those bonus plans that consist of pre-established pay and performance targets have been drawn from the CompArchive database for this analysis.


Overall, CEO total target pay has increased by roughly 3-6% per year since 2011. However, bonus targets as a fraction of total pay have held steady during this period, suggesting that the final payouts of cash bonus plans are constituting a smaller fraction of CEO pay today than they did in the past.

Why the change? 2011 was the first year in which advisory ‘Say on Pay’ votes became mandatory. Fewer than 3% of companies have had their pay plans rejected by a majority of shareholders, but the reputational damage and negative press coverage associated with a failed vote can be significant. It’s possible that the risk of a poor Say on Pay outcome is contributing to more rigorous performance goals, and correspondingly fewer above-target pay outcomes. Compensation committees may also be discretely lowering bonus pay outcomes relative to targets in cases where they fear a negative shareholder reaction to disclosed pay.


Our analysis suggests that today CEOs are ~5-10% more likely to receive an above-target bonus payout than a below-target payout. The data here provides a check for companies seeking to calibrate their CEO pay opportunities to those of competitors. If a performance goal has a likelihood of achievement of around 55%, then a target pay outcome pegged to target pay outcomes of peers will be competitive. If the likelihood of achievement is significantly lower, a higher target payout level may be appropriate. Conversely, if the likelihood of achieving the performance target is meaningfully above 55%, a target payout factor that is less than those of peers may be warranted.

1. The data cited here is sourced from disclosures in the Summary Compensation and Grants of Plan Based Awards Tables in company SEC filings. Pay disclosure follows the end of the fiscal year. For purposes of this analysis, FY2015 refers to all disclosures of prior year pay made during calendar year 2016.
2. Not all cash incentives have pre-established target levels of performance and payout. SEC disclosure rules require that such awards be classified as “non-equity incentive plan compensation” in the executive pay tables. The analysis cited here is based exclusively on such structured cash incentive plans.
3. Total target pay in this analysis refers to the sum of pay elements as disclosed in the Summary Compensation and Grants of Plan-Based Awards tables: annual salary, grant date value of equity awards, and target pay outcome for non-equity incentive plan awards.

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