Benefits April 22, 2014

Pension Values Offset CEO Compensation Increases

April 22, 2014 (PLANSPONSOR.com) – Total compensation for chief executive officers (CEOs) at the nation’s largest corporations remained relatively unchanged in 2013, Towers Watson finds.
Reported by

The primary reason for this is sharply lower pension values, according to a new analysis of proxies conducted by Towers Watson.

More specifically, the analysis finds total pay for S&P 1500 CEOs increased only 0.5% in 2013, down from the 5.7% median increase CEOs received in 2012. Total pay as reported in the summary compensation table (SCT) in company proxy statements includes base salary, actual annual and long-term cash bonuses, grant-date value of long-term incentives, restricted stock and long-term performance shares, the value of perquisites, earnings from deferred compensation and the change in the value of pension benefits.

Get more!  Sign up for PLANSPONSOR newsletters.

The limited size of total pay increases can be attributed to much lower values for executive pensions, driven down by higher interest rates, according to Towers Watson. If the impact of the change in pension values were excluded from the analysis, total SCT pay would have increased 4.3% in 2013.

The analysis found a 28% decrease in the change-in-pension-value component included in the SCT among S&P 1500 companies. Within this group, the largest movement was among the CEOs of S&P 500 companies, who are most likely to have defined benefit retirement programs. S&P 500 companies reported an average decline of 40% in the change-in-pension-value component, compared to an average decline of 17% among small-cap firms.

In addition, CEO pay movements from 2012 to 2013 varied notably by company size. For example, disclosed SCT pay for the largest companies (S&P 500) actually fell by 3.5% last year, again due to the impact of declining pension values, while pay for the smallest companies in the S&P 1500 rose by 2.5%.

The analysis also revealed realizable pay, which takes into consideration the current value of a CEO’s outstanding stock-based awards, increased nearly 15% last year, reflecting strong stock market performance. Therefore, while total reported pay remained flat last year, realizable pay increased by double digits, but was still outpaced by shareholder returns for the same group of companies.

The analysis, which is based on 430 S&P 1500 companies that filed proxies disclosing 2013 pay by late March, notes CEO salaries increased 2.7% in 2013, roughly the same as in 2012, while target annual bonuses increased 3% at the median. Additionally, the percentage of CEOs who received annual bonuses that were at or below target levels increased from 49% in 2012 to 53% in 2013. Target long-term incentives, the largest component of executive pay in major companies, increased 3.3% at the median in 2013, down from an increase of 9.8% in 2012.

The analysis also finds the mix of executive long-term incentives continues to shift to performance-based plans. Nearly eight in 10 (78%) companies awarded performance-based long-term incentive awards in 2013, compared with 67% in 2011. Meanwhile, 58% of companies awarded stock options in 2013, down from 64% in 2011. Total shareholder return remains the most prevalent performance metric companies use in their long-term incentive plans. Four in 10 companies (39%) that offer performance awards used this measure in 2013, while 32% used earnings per share.

Towers Watson found 15% of companies provided detailed disclosure of activities they took to engage with shareholders regarding executive compensation in their compensation discussion and analysis. Half of those companies made changes in their pay programs or disclosures in response to shareholder feedback.

    In addition, the fourth year for mandatory say-on-pay votes is off to a relatively positive start. Among the 196 of the Russell 3000 companies that disclosed their shareholder voting results by April 11, shareholder support averaged 92%. This is higher than in each of the first three years. Only one company in this sample failed to win majority support for its say-on-pay resolution so far this year. Fewer companies are receiving negative say-on-pay voting recommendations from proxy advisers.

    Benefits April 22, 2014

    Incentives for Small Business Health Benefits Could Be Improved

    April 22, 2014 (PLANSPONSOR.com) – Regulations designed to encourage small employers to offer employees health benefits could be improved, research suggests.
    Reported by

    A report from the Congressional Research Service (CRS) notes the Patient Protection and Affordable Care Act (ACA) contains several provisions to encourage employer-sponsored health coverage, particularly among small businesses. The provisions that most directly relate to small businesses are (1) an employer penalty for not providing health insurance, (2) a tax credit to increase the affordability of health care for the smallest firms, and (3) small business health insurance exchanges designed to increase plan options and lower plan costs.

    Analyzing the most recent employer size and insurance coverage data, CRS found the ACA’s employer penalty is structured so that it could exempt approximately 96.2% of employer firms simply because they would be too small, and thus fall below the employer penalty threshold of 50 full-time equivalent (FTE) employees. These exempt firms account for approximately 27.6% of all workers. However, after accounting for firms that already provide insurance, less than 1% of employer firms could be subject to the employer penalty. Although 72.4% of all employees work for firms that are large enough to be potentially subject to the penalty, only about 1.8% of employees work in firms that do not already offer health insurance.

    Never miss a story — sign up for PLANSPONSOR newsletters to keep up on the latest retirement plan benefits news.

    The report says less than 4% of small businesses that could have been eligible for the small business health care tax credit in 2010 actually claimed it. According to a report by the Government Accountability Office (GAO), many business owners felt the credit was too small of an incentive to begin offering insurance; even if these small employers offered health insurance, some employees declined coverage because they could not afford their share of the premium; and the rules were too complex.

    CRS says small business health exchanges could help reduce some barriers to accessing relatively affordable health coverage in the small-group market. By pooling risk among multiple businesses and reducing administrative costs, average insurance costs could reduce costs for these firms. On the other hand, firms with relatively healthier employees could see a rise in insurance costs.

    CRS discusses potential revisions to the law proposed by critics of the employer penalty. One issue of concern is the incentive for firms to reduce part-time employee hours below the 30 that define “full-time” employment (under ACA) as a means to exclude these employees from coverage. CRS notes several bills have been introduced to increase the definition of “full-time” to at least 40 hours per week. Although this change would reduce the incentive at 30 hours per week, it would introduce an incentive to reduce hours among those that work around 40 hours (a larger share of all workers), CRS contends.

    The report suggests the current small business health care tax credit could be expanded to encourage more small businesses to offer health care coverage, and potentially avoid the employer penalty.

    According to the report, the Obama Administration and some lawmakers have proposed to amend the small business tax credit to encourage and expand its use to more businesses. President Obama’s FY2014 budget proposes expanding and simplifying the credit. The budget recommends increasing the eligibility cut-off from 25 to 50 workers, changing the phase-out formula so more firms will qualify for at least part of the credit, and simplifying the calculation of the credit (by removing a requirement that an eligible employer pay a uniform percentage of the premium for each employee and also eliminating a cap on the credit based on the average health insurance premium in the employer’s state).

    In addition, in the 113th Congress, the Small Business Health Care Tax Credit Improvement Act of 2013 (H.R. 3046) would amend the tax credit to increase the maximum number of FTEs from 25 to 50, modify the phase-out of the credit, and repeal the limitation based on state health insurance premium averages. In addition, the Small Business Tax Credits Improvement Act (S. 1325) would also increase the maximum number of FTEs to 50, and increase the maximum wages cap to $37,500, among other provisions to increase the number of firms that could be eligible for the credit and the possible benefits awarded.

    The CRS report is here.

    «