Mercer/Wall Street Journal Study: CEO Compensation Tightly Tied With Performance

A study of the 350 largest US companies – The Wall Street Journal/Mercer Human Resource Consulting CEO Compensation Survey – shows that the median annual CEO bonus rose 20% in 2004 to $1.5 million, which was correlated closely with the median annual increase in net income, which was 23%. Also, median total direct compensation – which includes base salary, annual bonus, and the present value of long-term incentives – rose 17.1% to $7 million last year, which mirrored the median 17.4% increase in total shareholder return (TSR).

Salaries for CEOs, however, stayed relatively flat last year, rising 3.7% to a median $975,000 in 2004; nearly one-third of the CEOs received no base salary increase last year. However, this still led to an rise in median total annual compensation (base salary and annual bonus) of 14.5%, now at $2.5 million.

class=”NormalIndent2″> Mercer’s study also found somewhat close correlations between pay and performance with both high- and low-performing companies. At the 75th percentile, an increase of 36% in TSR was mirrored by an increase of 45.9% in CEO total direct compensation; at the 25th percentile, an increase of 6.3% in TSR was matched by a decrease of 3.6% in CEO total direct compensation.

class=”NormalIndent2″> The make-up of overall CEO compensation has certainly been changing as of late. In 2001, long-term incentives (LTI) made up 71% of the overall CEO pay mix; in 2004, this figure was 56%. In this time period, the proportion represented by salary rose from 16% to 19%, while the portion represented by annual bonus climbed from 13% to 25%.

class=”NormalIndent2″> The long-term incentive component of salary has also changed, according to the survey. Stock options declined from 76% of LTI value in 2002 to 57% in 2004, while restricted stock rose from 12% to 22% of LTI value. Long-term performance shares rose from 12% to 20% of LTI value over that same period, the survey reports.

class=”NormalIndent2″> Mercer’s study also showed that both burn rates – shares granted annually as a percentage of common shares outstanding – and overhang levels (shares reserved for outstanding grants plus shares available for future grants as a percentage of common shares outstanding) – hit their peak in 2001 and have been declining since. Median overhang for 2004 was 14.2%, down 0.5% from 2003 and 0.8% in 2001, while the median burn rate for 2004 was 1.4%, down from 1.6% in 2003 and a high of 2% in 2001.

The tight correlation between CEO pay and performance was seen across most industries, according to the study. The median increase in total annual compensation outpaced the median increase in net income in only two industries in 2004 – consumer goods and telecommunications. Median total annual compensation rose significantly in only three sectors – basic materials (58.2%), consumer goods (25%), and industrials (24.9%) – in spite of even higher increases in 2004 net income in several of those same sectors.