Study examines link between executive pay and company performance at 10 top American cities
– Surprisingly some execs at high performing companies see pay decreases, while their poor performing counterparts receive increases –
Study By BDO
leading professional services firm
Chicago, IL – August 3, 2010 – Research released by BDO, a leading professional services firm, examined the link between executive pay and company performance in 10 cities across the US. Surprisingly, the CEOs of companies with the best performance – expressed by total shareholder return year-over-year – did not necessarily receive the highest pay increases. While overall, CEOs of companies with positive shareholder returns received pay increases and those with negative shareholder returns saw pay decreases, there were notable exceptions to this trend, especially in the margins for each group.
When comparing the bottom tier of the top performing companies with the top tier of the bottom performing companies across all 10 cities, the links between pay and performance became elusive. The one constant across all 10 cities is that CEO compensation decreased (by 21%) for the companies with positive shareholder returns who were on the lowest quartile. This may be attributed to the fact that while year-over-year shareholder returns are up, they are likely bouncing back from extreme lows due to the financial crisis and still have not returned to pre-crisis levels… prompting a more conservative approach to managing pay. Conversely, the top tier of the bottom performing companies saw a median increase of 9 %…possibly a sign of a more liberal approach to managing pay by rewarding efforts to minimize losses while offering incentives for turnaround and retention of executives.
Chicago, Atlanta and LA had the smallest discrepancy between pay and performance with each seeing an average of 30% difference in pay versus performance, as opposed to a 110% difference in New York, 80% in Houston and 75% in Dallas.
“Tying pay to company performance is critical now given the increased scrutiny both from regulators and shareholders around executive pay,” said Mike Conover, Senior Director in the Compensation and Benefits Practice at BDO. “The typical analyses of CEO pay focus only on the very largest companies and mix good and bad performers together; the resulting averages tell us nothing about performance and pay. Our analysis showed us that larger performance-based awards explained the positive compensation change observed in the year-over-year comparison for top performers. However, we also noticed that some of these top performers did decrease salaries, short-term and stock-based incentives. This certainly dampened the magnitude of pay changes for some in the top performing group. Similarly, we observed salary increases, larger bonuses, options and stock grants among some of the poorer performing companies that cushioned the magnitude of the decline in pay from the prior year.”
Undoubtedly, 2009 was certainly one of the most challenging years on record in terms of business conditions and the compensation decision making associated with them. While not the case in every situation, it appears that pay and performance were still connected. As we’ve noted, groups on the margins may have proved contrary to the expectation that positive shareholder returns equal pay increases and vice versa. However, of the top 25 performing companies in each city – the median company increased shareholder returns by 98% and increased pay by 6%, compared to the bottom 25 performing companies who decreased shareholder returns by 11% and decreased compensation by 9%.
Further findings of the 2010 BDO Compensation Trends by City Study:
San Francisco companies were most stable in terms of shareholder returns, but CEO pay declined. San Francisco was the only city whose poor performing companies still saw a median increase in total shareholder returns (4%). It was also the only city whose top performing companies saw a decrease in compensation at a median value of -14%, even though San Francisco enjoyed the second highest total shareholder return of any city, at 155%. Surprisingly, while CEOs at top performing companies in San Francisco took the 14% pay cut, those at the lower performing companies only took a 9% pay cut.
New York City shareholder returns reached highest highs and lowest lows. High performing companies in New York City saw a 243% shareholder return over the past year; nearly 100% more than any other top performing city, with San Francisco and Houston coming in second and third with total shareholder returns of 155% and 152% respectively. Poor performing companies in New York were at the other extreme, with an average total shareholder return of -27%. Other low-ranking cities included Houston, which saw a -19% total shareholder return, followed by -13% in both Dallas and Boston.
Atlanta had the most volatile CEO compensation. While New York companies had extreme shareholder returns, Atlanta’s CEOs had the most to lose when it came to compensation. This city had the highest compensation increase for top performing companies at 54%, and the lowest compensation decrease for poor performing companies at -25%.
These findings are from the 2010 BDO Compensation Trends by City Study. The study examined the change in CEO compensation over the past year for companies with fiscal year end in December 2009 or later, compared to the total shareholder return at the top 25 performing companies and the bottom 25 performing companies across 10 US cities: Atlanta, Boston, Chicago, Dallas, DC, Houston, LA, Miami, New York, and San Francisco.