Top U.S. companies made few changes to overall pay levels in 2009, despite a year of remarkable turbulence for executive pay, according to results from The Wall Street Journal/Hay Group 2009 CEO Compensation Study released on April 1. The Wall Street Journal partnered with Hay Group for the third year on its annual study, which examines how large companies were compensated across all forms of pay in fiscal year 2009.
For the second straight year, pay levels decreased in 2009, but only modestly, according to the study. Base salaries were flat at $1,030,000, while annual incentives grew 3.4 percent to $1,523,701, yielding an overall cash compensation increase of 3.2 percent to $2,637,884. When factoring in long-term incentives (LTI), however, which fell 4.6 percent to $5,007,556, total direct compensation fell a modest 0.9 percent to $6,947,976.
At the same time, 2009 pay practices edged away from the pay-for-performance momentum of the previous two years, as many companies began to reduce emphasis on performance-based long-term incentive plans in favor of time-vested plans, and paid out higher bonuses for less profitable results. According to the study, stock options re-emerged as the dominant LTI vehicle, with 70 percent of companies using them (up from 63 percent in 2008). Performance-based plans stayed in the mix, increasing slightly to 66 percent of companies (up from 64 percent in 2008). However, time-vested restricted stock showed the biggest jump, with 48 percent of companies using the LTI vehicle in 2009 (up from 34 percent in 2008).
“During a year when compensation committees faced unprecedented shareholder, governmental and public pressure, many expected to see landmark changes in the way CEOs were compensated in 2009,” said Irv Becker, national practice leader of the U.S. executive compensation practice at Hay Group. “Instead, we found many compensation committees were focused on retention of their top talent, putting significant long-term value back on the table for executives and lowering the bar on annual performance targets. The combination of the two made pay programs less performance-based.”
Perquisites, which remains a “hot button” issue as institutional shareholder groups and executive pay watchdogs tracked their use, were reduced by 22 percent of top U.S. companies in 2009, according to the study. Nearly every type of perquisite tracked declined in prevalence, led by reductions in tax gross-ups on perquisites, use of company car and spousal travel, which each showed double-digit percentage declines. For the second year in a row, the most prevalent perquisite remained personal use of corporate aircrafts, which declined only modestly from 2008.
Other key findings from The Wall Street Journal/Hay Group 2009 CEO Compensation Study include:
- Shareholder return increased despite a decline in company performance: The median company’s net income declined 5 percent from 2008, but showed a significant one year total shareholder return (TSR) of 21.5 percent. “Despite having made less money than in 2008, companies created remarkable value for shareholders in 2009,” added Becker. “A return of investor optimism to the market contributed to shareholders regaining much of the value they lost during a turbulent 2008.”
- Technology companies saw a sharp decline in pay, while Consumer Services companies soared: The sharpest declines in executive pay were seen in the technology sector, where total direct compensation declined 10.1 percent in 2009 against a net income drop of 19.1 percent. On the other end of the spectrum, consumer services companies had a strong year, with a growth in net income of 13.7 percent and an increase in total direct compensation of 5.6 percent.
- Financial Services companies rebounded, while pay remained flat: The industry at the center of the economic downturn – financial services – actually showed the greatest rebound in performance with a 20.2 percent increase in net income off of a horrific 2008, but, perhaps in acknowledgement of the hostile environment for banking pay, pay levels remained flat.
“Looking forward, it’s clear that shareholder empowerment and the role of risk in compensation will impact the way compensation committees evaluate executive pay,” said Becker. “As companies prepare for 2010 and beyond, it’s critical that they learn what really matters to shareholders, and engage them in a productive dialogue about these executive pay issues.”
About The Wall Street Journal/Hay Group 2009 CEO Compensation Study
The 2009 study focused on 200 companies with more than $4 billion in annual revenue that filed their proxy statements between October 2009 and the end of March 2010. Hay Group researched these public filings, examining all primary components of CEO compensation. Additional information about the study can be found at www.haygroup.com/wsj.
