CEO pay also grew at smaller companies where pensions had less impact. The Russell 3000 index (excluding the S&P 500) experienced a more pronounced increase in pay, with median total compensation (also excluding pensions value changes) increasing by more than a third between 2011 and 2015. However, the effect of pension values was muted outside of the S&P 500, as supplemental executive retirement programs (SERPs) are less common at smaller companies.
Developments in Incentive Compensation
Say-on-pay has spurred performance-based incentives. Since say-on-pay came into play in 2011, there have been dramatic changes in the composition of executive compensation. Discretionary bonuses and time-vesting equity awards have been increasingly replaced by cash and equity incentives that are conditioned upon the achievement of pre-established goals. Companies have also increased the proportion of equity awarded in the form of full value shares. Other non-performance-based pay elements, such as executive perquisites, have similarly become less prevalent.
Discretionary bonuses continue to fall out of favor. By 2015, the prevalence of companies paying discretionary cash bonuses (as disclosed in the "Bonus" column of the Summary Compensation Table) had dropped by 4 percentage points in each index. By contrast, 86 percent of the S&P 500 and 71 percent of the Russell 3000 paid performance-based, non-equity incentives in each year.
A Look Ahead
The return of say-on-pay frequency votes. Companies are required to hold say-on-pay frequency votes at least once every six years, which means that 2017 will be the next wave of these proposals after they first appeared in 2011. While ISS expects that most companies will continue to propose an annual frequency, we may see some companies propose a triennial frequency if they can point to a history of high support for their say-on-pay proposals.
Focus on director pay? As a result of several recent lawsuits involving director compensation and the increasing shareholder scrutiny on the topic, some companies have sought shareholder ratification, on an advisory basis, of their director pay programs, seemingly in an effort to stave off potential litigation. The 2016 season saw a handful such proposals, and we expect to see more of these proposals next year.
The foregoing is an excerpt from ISS' 2016 United States Compensation Post Season Review. The full report can be found here on the ISS Governance Exchange.
