ADVANCE/Executive stock ownership on the rise; tighter linkage between CEO pay and corporate performance.(ADVANCE) NEW YORK--(BUSINESS WIRE)--JUNE 26, 1996--CEOs own increasingly larger amounts of stock in their companies -- eight times annual base salary at the median and up significantly from five-times-pay multiple recorded just two years earlier, according to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. the annual study of CEO (1) (Chief Executive Officer) The highest individual in command of an organization. Typically the president of the company, the CEO reports to the Chairman of the Board. pay practices among leading U.S. companies conducted by management consultants Towers Perrin Towers Perrin is a global professional services firm. It was established 1 March 1934 as Towers, Perrin, Forster & Crosby. The umbrella name of Towers Perrin was adopted in 1987. . This year's analysis, which is based on current proxy statement Proxy Statement A document containing the information that a company is required by the SEC to provide to shareholders so they can make informed decisions about matters that will be brought up at an annual stockholder meeting. data for the S&P 500, also indicates that CEO stock ownership levels do vary by company performance, with the higher-performing companies (as measured by 1995 total return to shareholders) recording higher median CEO ownership levels (10-times salary) than the medium or lower-performing companies (with ownership multiples of 8-times and 6-times salary, respectively.) The rise in ownership is due largely to shareholder pressure to give top executives and, increasingly, corporate directors as well, a sufficiently large In mathematics, the phrase sufficiently large is used in contexts such as:
 līn),v to move the teeth into their proper positions to conform to the line of occlusion. their interests more closely with those of shareholders themselves. Many companies now use guidelines guidelines, n.pl a set of standards, criteria, or specifications to be used or followed in the performance of certain tasks. that require top executives to own a specified amount of stock over a given period. For shareholders, such guidelines often come to represent a yardstick indicating the depth of management's commitment to building long-term Long-term Three or more years. In the context of accounting, more than 1 year. long-term 1. Of or relating to a gain or loss in the value of a security that has been held over a specific length of time. Compare short-term. shareholder value. "We've seen a clear pattern over the last few years in terms of using stock ownership to put more CEO pay `at risk' relative to the economic health of their companies," said Paula H. Todd, a Towers Perrin principal and head of the firm's executive compensation research effort. "For example, if a CEO owns five times his or her base salary in company stock and the stock price drops 20% in one year, that effectively wipes out the CEO's base salary for that year. Just a few years ago, that kind of forced connection between pay and performance through stock ownership was inconceivable." CEO COMPENSATION For the 192 CEOs in the sample in both 1994 and 1995 (the "constant incumbents"), median total annual compensation (salary plus annual bonus) was $1,554,000 in 1995. As befitting be·fit·ting adj. Appropriate; suitable; proper. be·fit  ting·ly adv.Adj. 1. several years of focus on paying for performance, most of the growth in annual pay came in the variable annual incentive, rather than in the fixed element of base salary CEO median base salary for the constant incumbent group was up 7% last year, rising to $805,000 from $750,000 the prior year. The CEO median annual bonus by contrast, rose 16% -- reaching $725,000 from $623,000 the prior year. Moreover, not all CEOs saw their annual compensation increase last year. For just under a quarter (24%), base salary dropped or remained unchanged. And for 29% of the CEOs, bonuses either were cut or held at the prior year's level. "The increased emphasis on variable pay elements and stock ownership creates a larger downside Downside The dollar amount by which the market or a stock has the potential to fall. Notes: You might hear someone say that the downside on stock XYZ is $10. What that means is that the stock could fall by this amount if things got bad. for CEOs when their company doesn't perform well," said Todd. "Shareholders especially like having a significant portion of a CEO's pay tied to value-based measures, such as stock performance." USE OF INCENTIVES IN THE PAY MIX The Towers Perrin analysis found that incentives are firmly at the core of CEO compensation. Two thirds of the average CEO total reward pay package is delivered through annual and long-term incentives (43% and 23%, respectively). Just over a quarter (27%) is provided through base salary and the remainder (7%) in various benefits. Just six years ago, by contrast, incentives were only slightly more than half (55%) the total package, with base salary making up 37% of the total. (See Attached Chart.) For the CEO constant incumbents, median total direct compensation (which includes base, bonus and the expected value Expected value The weighted average of a probability distribution. Also known as the mean value. of long-term incentives) reached $3.2 million in 1995, up 23% from the previous year. Most of this growth came from the combination of actual and prospective payouts from annual and long-term incentive plans. The median expected value of long-term incentives for the CEO last year was $1.4 million. (Stock option values are calculated using the Black-Scholes option pricing model option pricing model A mathematical formula for determining the price at which an option should trade. The model expresses the value of an option as a function of the value of the underlying asset, length of time until maturity, exercise price, yields on .) The proxy analysis also shows clear differences in incentive payouts to CEOs among the higher and lower performing companies (as measured by 1995 total shareholder return), further highlighting the pay-for-performance connection inherent in incentives. The CEO median annual bonus at the higher performing companies was about 86% greater than at the lower performing companies. A similar pattern showed for the expected value of CEO long-term incentive payouts as well, with the median value Noun 1. median value - the value below which 50% of the cases fall median statistics - a branch of applied mathematics concerned with the collection and interpretation of quantitative data and the use of probability theory to estimate population at the higher performers 75% higher than that of the median value at the lower performers. There was only a 16% differential in CEO median base salary, however, between the higher and lower performing companies. Stock options remain the most common long-term incentive in use, granted by 89% of the companies in the proxy analysis. This is up from 75% granting stock options the previous year. Other long-term incentives in use include restricted stock (42%), performance shares (14%), performance cash (14%) and performance units (8%). "Accountability remains a big theme in executive pay," noted Todd. "Both companies and their shareholders feel strongly about holding executives accountable for their actions through their compensation packages. Interestingly, we're noting the same trend In broad-based employee pay design as well, with companies building more variability into their pay mix for employees, and using incentives to guide behavior and focus attention on key goals. Over time, incentives may be an effective way to bring more symmetry symmetry, generally speaking, a balance or correspondence between various parts of an object; the term symmetry is used both in the arts and in the sciences. to structure and focus of pay for executives and employees." The Towers Perrin 1996 proxy analysis included 250 companies across a range of industries. Eighty-six percent are industrial and service companies, with sales ranging between $378 million and $165 billion. Median sales were $6 billion. The remaining organizations are financial institutions with assets ranging between $3.5 billion and $273 billion. Median assets were $63 billion. Towers Perrin is one of the world's largest management consulting firms List of Management Consulting Firms 1. McKinsey & Company 2. Marakon Associates 3. Boston Consulting Group (BCG) 4. A.T. Kearney 5. Booz Allen Hamilton (BAH) 6. Monitor Group 7. Bain & Company 8. Roland Berger . It helps organizations manage their investment in people, advising them on human resource management, employee benefits, compensation and communications as well as overall strategy and organizational effectiveness Organizational effectiveness is the concept of how effective an organization is in achieving the outcomes the organization intends to produce. The idea of organizational effectiveness is especially important for non-profit organizations as most people who donate money to non-profit . Headquartered in New York City New York City: see New York, city. New York City City (pop., 2000: 8,008,278), southeastern New York, at the mouth of the Hudson River. The largest city in the U.S. , the firm has approximately 5,500 employees and offices in 73 cities worldwide. -0- EXECUTIVE STOCK OWNERSHIP Incentives now account for more than half of typical CEO pay package Average CEO Pay Mix
1989 1995
Base Salary 37% 27% Annual Bonus 24% 23% LT1 31% 43% Benefits 8% 7%(End of advance for release 6 a.m., Wednesday, June 26, 1996) CONTACT: Towers Perrin David Fridling, 914/745-4179 |
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