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CEOs are Paid for Performance.

Pay Governance LLC Study Finds Close Alignment of Realizable Compensation and Stock Price

NEW YORK -- As the furor over CEO compensation at U.S. companies has reached a new high, new research shows that the pay of executives is closely aligned with their actual performance. High performing companies tend to have relatively highly paid leaders while low performing companies compensate their CEOs at much lower levels, according to a new study by Pay Governance, LLC, one of the nation's premier independent and non-affiliated compensation consulting firms.

A review of 2011 SEC proxy filings for nearly 400 companies demonstrated strong alignment of a company's stock price performance with realizable CEO pay. Executives at high performing companies earned more than their counterparts at firms delivering less value to shareholders. These findings do not support charges by critics in the media, public, and among regulators, government officials and some shareholders that CEO pay is generally not proportionate with the company's performance. This is an extremely important finding given say-on-pay votes and the empowerment of proxy voting advisors.

"Contrary to claims made by compensation critics, there is a very strong relationship between pay and performance as reflected through realizable pay," said Pay Governance managing partner Ira Kay. "These findings are consistent with other pay-for-performance research we have done on thousands of companies over the past 10 years, as well as industry studies performed for many of our clients."

The Pay Governance study found that over a three-year period, cumulative realizable pay from stock incentives at high performing companies was $19 million - 55 percent higher than at comparable low performing companies. Similar results have been found in other studies conducted by the firm.

The gulf between high and low performing companies is consistent with striking differences in total shareholder return (TSR). The high achievers realized a 5.6 percent TSR over three years compared to -8 percent for the others. For a typical company with a $10 billion market cap, this disparity translated into a difference of almost $1.4 billion in valuation.

Most critics of CEO pay tend to only look at pay opportunity - target cash compensation and the value of equity incentives on the date of grant - which can create the appearance of high pay compared to performance. Pay Governance conducted its evaluation of CEO compensation using a realizable pay metric - the best representation of an executive's actual pay during a particular time period. This figure is the sum of actual cash compensation earned, the aggregate value of in-the-money stock options, the current value of restricted shares, actual payout from performance share or cash plans, plus the estimated value of outstanding performance share or performance contingent cash.

The alignment between pay and performance found in these measurements is directly tied to the substantial amounts of stock-based incentives in these compensation packages (see Figure 1). Other assessment methods cannot provide this clear linkage of pay and performance because the time period used to measure pay opportunity is usually not concurrent with the one used to measure performance.

"We have consistently used realizable pay to make comparisons between compensation and performance," said Kay. "Although we most often make comparisons over three-year periods, we have been able to use longer periods of time, capturing an individual executive's compensation over their entire career."

For its pay for performance study, the company examined long-term stock-based incentives for CEOs who had served three or more years at 374 S&P 500 companies filing proxy statements from 2008 through 2010. The study was limited to companies that had filed proxy statements and had held Say on Pay votes by mid-June 2011. These firms had median revenues of $8 billion and market capitalizations of $11.7 billion.

For more details on this Pay Governance study or to schedule an interview, please call Don Rountree with Rountree Group at 770-645-4545.

About Pay Governance

Pay Governance LLC is a full service executive compensation consulting firm providing independent, objective, fact-based advice on compensation architecture and competitive pay levels. The firm helps companies ensure that their programs pay for performance and have the appropriate corporate governance and risk structure. It is Board- and Committee-focused but will accept management engagements if the Committee already has an executive compensation advisor. For more information, visit


Figure 1: Relationship Between Company Performance and Realizable LTI* Value



Aggregate Over Three-Year Period (2008-2010)

Total Shareholder Return (TSR)

Realizable LTI Value

Ratio: Realizable LTI Value to LTI Opportunity

Companies with high TSR





Companies with low TSR





All companies





The analysis shown above bifurcates the sample of companies according to performance (e.g., high TSR means TSR above the overall median) and shows the median values of three-year TSR and realizable LTI and the ratio of realizable LTI value to opportunity for each of high- and low-performing subgroups.

*Long-term Incentive
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Publication:Business Wire
Geographic Code:1U2NY
Date:Nov 8, 2011
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