Linking CEO pay to performance.COMPENSATION for chief executives was up dramatically in 2004, but that doesn't mean the system is broken. In fact, says Mercer Human Resource Consulting Mercer Human Resource Consulting is a human resource consulting firm that publishes the oft-quoted "Worldwide Cost of Living Survey." External links
The Mercer mer·cer n. Chiefly British A dealer in textiles, especially silks. [Middle English, from Old French mercier, trader, from merz, merchandise, from Latin merx study, which analyzed proxy statements 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. of 350 of the largest U.S. publicly traded companies publicly traded company A company whose shares of common stock are held by the public and are available for purchase by investors. The shares of publicly traded firms are bought and sold on the organized exchanges or in the over-the-counter market. , found that total direct compensation (base salary, annual bonus and the grant value of stock options, restricted stock and other long-term incentives [LTI LTI Linear Time Invariant LTI Long Term Incentive (NZ) LTI Lingua Tertii Imperii (language of the NAZI empire, Latin) LTI Lost Time Injury LTI Leadership Training Institute LTI Lost Time Incident ]) increased 17.1 percent in 2004 (see chart, right). That increase was less than the overall rise in the companies' net income, or a median of 23 percent. [GRAPHIC OMITTED] The era of chief executives receiving large pay hikes even when their companies underperform Underperform An analyst recommendation that means a stock is expected to do slightly worse than the market return. Also known as market underperform, moderate sell, or weak hold. seems to have ended. At the 75th percentile percentile, n the number in a frequency distribution below which a certain percentage of fees will fall. E.g., the ninetieth percentile is the number that divides the distribution of fees into the lower 90% and the upper 10%, or that fee level measuring annual pay and performance, CEOs whose companies' net income increased 76.5 percent saw their bonuses increase 76 percent. But at the 25th percentile, CEOs whose companies' net income increased only 6.2 percent received no increase to their bonus at all. The breakdown of total compensation is tilting away from the LTI component. The median LTI grant value increased $487,600, due largely to improved stock prices rather than to larger awards. The composition of LTI is also shifting (see charts, bottom); companies are using a variety of vehicles to deliver long-term incentives. The key is linking pay to performance: Variable pay (both annual and long term) now constitutes 85 percent of the pay package, up from 82 percent in 2003. Even within a single company, Mercer says it sees multiple equity vehicles and cash plans combined with equity to reward long-term performance. The use of performance-contingent equity awards is expected to become a prevalent practice in coming years, the Years, The the seven decades of Eleanor Pargiter’s life. [Br. Lit.: Benét, 1109] See : Time firm says. Because compensation drives behavior, more CEOs are going to be thinking for the long term.
... but more of it was long term
2002 2003 2004
Salary 16% 18% 15%
Bonus 16% 19% 23%
Long-term incentives 68% 63% 62%
... and the makeup also changed.
2002 2003 2004
Stock option 76% 62% 57%
Restricted stock 12% 20% 23%
Performance units/shares 12% 18% 20%
Source: Mercer Human Resource Consulting
Note: Table made from pie chart.
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