executive compensation trends - the cfo alliance · pdf file– direct emails to: •...

Executive Compensation TrendsA Presentation for The CFO AllianceJanuary 10, 2013

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Agenda

• 2012/2013 CFO Alliance Executive Compensation Study – Trend Data for

the Middle Market

• Executive Compensation in the Middle Market

• Compensation Best Practices All Companies Should Know


2012 CFO Alliance Executive Compensation Study – Trend Data for the Middle Market


2012/2013 Executive Compensation Trend Data for the Middle Market

• High quality, reliable executive compensation data for middle market organizations has been scarce.

• Verisight partnered with The CFO Alliance, McGladrey, Wake Forest University and Fordham University to develop and implement an executive compensation survey for mid-market organizations.



• Survey data was gathered via:

– The CFO Alliance website

– Verisight website

– Direct emails to:

• CFO Alliance members

• Verisight clients

– Referrals from other survey partners



• Participating organization’s headcount ranged from less than 50 to just over 4300 FTE

• Revenue size ranged from under $1M to $2.6B

• Budget size for the Non-Profit organizations ranged from less than $1M to nearly $200M

• Participating organizations came from 34 states, with the largest numbers coming from the East (92) and Midwest (75) regions

• Wide range of industries, with the largest participating industries coming from the Manufacturing and Non-Profit sectors



• The 2012 Executive Compensation Study covers a range of organizational and compensation variables, including:

– Industry

– Organization type/ownership structure

– Growth

– Financial performance

– Compensation practices



• The 2012 Executive Compensation Study provides actual compensation levels:

– Base salary

– Short-term variable compensation

– Total cash compensation

– Long-term variable compensation

– Total direct compensation




High level observations include:

• 2013 base salaries for executives are projected to increase by 3%.

• Higher growth companies increase executive pay at a much faster rate than lower growth companies

• Total cash compensation, regressed against revenue, across all industries, yields the following pay levels:

– For companies with $150M in revenue, total cash compensation levels are:

• CEO - $600K

• COO - $430K

• CFO - $370K

– For companies with $50M in revenue, total cash compensation levels are:

• CEO - $450K

• COO - $330K

• CFO - $290K

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2011

43%

48%

52%

65%

Attracting Talent

Driving Employee Performance

Employee Retention Challenges

Benefits Costs

44%

47%

48%

49%

58%

Driving Employee Performance

Attracting Talent

Employee Retention

Corporate Performance

Benefits Costs

2012

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Factors Impacting Total Rewards Decisions

Source: Verisight’s 2012/2013 Compensation, Retirement and Benefits Trends Study


Verisight collected 3-year trend data for revenue growth and associated changes in median compensation levels.


All Executives

Company Growth

(36 months)

Company Growth

(median)

Base Salary Change

Total Cash Change

<10% 1.1% 3.4% 3.4%

11-50% 23.6% 5.1% 9.8%

50%+ 84.6% 10.0% 15.0%


Verisight collected 3-year trend data by company size and associated changes in compensation levels.


All Executives

Company SizeBase Salary Change

Total Cash Change

Small ($0-$49m) 6.6% 11.4%

Medium ($50-$199m) 5.1% 9.1%

Large ($200m+) 4.3% 12.8%


Verisight collected data on total cash compensation pay mix by position.


Position Compensation $50M $250M $750M

CEO

Base 76% 68% 62%

STI 24% 32% 38%

COO

Base 77% 70% 66%

STI 23% 30% 34%

CFO

Base 80% 75% 72%

STI 20% 25% 28%

Top Engineering

Base 82% 73% 67%

STI 18% 27% 33%

Top Legal

Base 87% 80% 76%

STI 13% 20% 24%

Top Marketing

Base 90% 82% 77%

STI 10% 18% 23%

Top Marketing & Sales

Base 89% 91% 91%

STI 11% 9% 9%

Top Sales

Base 76% 73% 71%

STI 24% 27% 29%


Verisight collected data on eligibility for short-term (STI) and long-term (LTI) incentive eligibility.


Position STI Eligible LTI EligibleCEO 74.4% 36.1%COO 82.2% 35.1%CFO 80.3% 34.7%


Verisight collected data by company size for total cash levels of executive positions versus CEO (cascade).


Executive Compensation in the Middle Market


Mid-Market Executive Compensation Trends

• Mid-size organizations are often characterized by a singular product/service focus, dissimilar to large public companies.

• Ongoing economic challenges force owners/stakeholders to redefine business model focus

- Anticipate and respond to changing needs of customers

- New products and services and close scrutiny of feasibility

• Renewed focus on drivers of long-term shareholder value

- Longer range view of business model

- Increased innovation, flexibility, agility

- Change in what constitutes performance; higher visibility

- Increased focus on human capital management, performance and pay

• Increased prevalence of LTIPs in mid-size organizations



Increased LTIP prevalence is also due to:

• Demographics

- 26.6 M U.S. workers 55 or older in 2010

- Willing to leave employer for better benefits and/or long-term incentives

• Retirement plan shortfall

- 3% of privates with D.B. plans compared to 17% of all employers

• Talent war

• Enterprise value will ultimately drive upward

• PEGs

• Board cross-pollination

• Ownership/management succession



Use long-term incentives to reward long-term contribution and promote stability :

• Most common long-term incentive arrangements for privately-held organizations

– Performance unit plans

– Stock appreciation rights/phantom stock

– Restricted stock

• Most common long-term incentive arrangements for public companies

– Stock

– Restricted stock

– Stock options (less popular in current environment)



Ownership succession

• 50% to 75% of privately-held companies will undergo ownership transition in the next 5 to 15 years

• 60% to 70% do not have a comprehensive ownership and succession plan

- Mid-size publics will likely develop/update succession plans for Dodd Frank compliance purposes

• Absence of a comprehensive continuity plan represents a significant risk to shareholders/owners, customers, financiers, potential suitors

• Increased need for management succession plans in mid-sized organizations



Say on pay in the middle market

• Executive compensation program should

– Establish strong pay-performance linkage

– Align with management succession plan

– Remove potential barriers to ownership transition and strategic transactions

– Enable recruitment , motivation, retention of key executives from larger companies to drive future growth



Middle market designs - public

• Public company approaches

• Pick up some proxies!!



Middle market designs - private

• 3 Big Factors

- Presence/absence of ownership on the executive team

• Alignment of owner/stakeholder goals and executives’ efforts

- Shareholder/owner desire to utilize equity for compensation purposes

• Dilution

- Suitability of share price as a vehicle for compensation purposes

• Linkage between share value and company performance




• Presence/absence of ownership on the executive team

– Quite prevalent

– Ownership transition

– Offspring

– Learning/has learned the business

– Reports to non-executive owners on the Board

– Serves on executive team with non-owner outsiders




• Heterogeneity of executive team

– Unique to closely held public/private businesses

– One or more executives also part of ownership constituency

– Remainder of executives not

• Owner/executive “already in an LTIP”

• Challenge: Create a level playing field for all executives




• Shareholder/owner desire to utilize equity for compensation purposes

– Use of equity is now fairly rare

» Movement/disposition of company equity is largely driven by estate planning and family business agreements and transactions

» Generational transition already increases dilution

» Reticence to expand ownership to non-owners/non-family

» Tax structure (C-Corp, etc.)

» Availability of stock shares

1. Classes of stock

2. Voting/non-voting




• Suitability of share price as a vehicle for compensation purposes

- Linkage between:

• Financial performance

• Enterprise value

1. Third party

2. Formulaic

3. Arm’s length

• Share value


Plan Design Examples

Stock Appreciation Rights/Phantom Stock

� Company grants phantom shares with a base value equal to the company’s current book value

� The phantom shares have value to the participant as the book value increases

� The participant receives the difference in share value over the base value (i.e., net value) as a cash payment at a specified date or upon achieving certain performance criteria

29


Middle market designs - healthcare

• Achievement of System strategic goals will only be accomplished via functional integration across operating-entities and/or departments.

- Linkage between:

• System Operating Margin

• Clinical Quality

• Patient Safety


Performance Unit Plan Example

Performance Unit Plan

The performance unit plan (PUP) provides executives with specified award opportunities in return for achieving specific predetermined long-term corporate goals. The amount of earned awards depends on the degree to which the goals are achieved.

• At the beginning of the performance period, organization will establish three or four year performance goals, often aligned with financial and/or non-financial business objectives.

• Participants are awarded “units” based on their potential contribution to attaining thethree/four year objectives.

• The value of a unit is based on achieving the predetermined corporate objectives.

• At the end of the three/four year period, participants receive earned rewards to theextent the predetermined goals are achieved.

• A new three/four year performance cycle is begun at the beginning of the fourth/fifthyear respectively, or concurrent three/four year performance periods are establishedeach year.


Performance Unit Plan – Payout Example

32

Payouts are made at the end of the three/four year performance period based upon theachievement of established goals (this example assumes ‘Target’ performance)


Operating

Margin Quality

Composite Threshold TBD TBD TBD TBD

3% $0 $200 $400 $600 $800

4% $150 $350 $700 $825 $950

5% $183 $400 $750 $883 $1,017

3% $217 $450 $800 $942 $1,083

4% $250 $500 $850 $1,000 $1,150

5% $300 $550 $900 $1,058 $1,200

3% $350 $600 $950 $1,117 $1,250

4% $400 $650 $1,000 $1,175 $1,300

5% $450 $675 $1,025 $1,200 $1,342

3% $500 $700 $1,050 $1,225 $1,383

4% $550 $725 $1,075 $1,250 $1,425

5% $600 $750 $1,100 $1,275 $1,450

3% $650 $775 $1,125 $1,300 $1,475

4% $700 $800 $1,150 $1,325 $1,500

5% $900 $1,200 $1,400 $1,500 $1,600

Patient Satisfaction

Rank 13

Rank 16

Rank 15

Rank 14

Rank 17

PUP Granting Strategy

33

• Grants are planned to be made annually with overlapping performance periods

• Grants will be made at the discretion of the CEO and/or Board

2012 2013 2013 2014 2015 2016

Grant Payout

Grant Payout

Grant Payout

Discussion Questions

• What are the most noticeable trends you are seeing in executive compensation below the Fortune 500?

• Do mid-market companies handle executive compensation differently than large corporations, and how?

• How are companies managing limited budgets to drive reward the workforce and drive strategic objectives?


Compensation Best Practices All Companies Should Know


Best Practice #1: Defining a Total Rewards Philosophy is key

Organization Strategies

Base Salary

Long-Term IncentivesShort-Term Incentives

Benefits

Work-Life

Recognition

Learning and Career Development

Pay &Reward Objectives

Organization Style & Culture

Information &Support Systems

Stakeholder Concerns & Objectives

Competitive Pay & Reward Policies

Industry, Legislation, Market &Economic Development

Total RewardsPhilosophy


Best Practice #1: Defining a Total Rewards Philosophy is key


53%

52%

47%

71%

Retirement

Health and Welfare

Incentive Compensation

Base Salary

Percent of Organizations Positioned “At Market”

Best Practice #2: Base compensation management should be market-based and performance drivenBegin by developing a Compensation Administration Framework

Reflects value of position:

• External competitiveness analyzed

• Internal equity evaluated (could be formula driven)

Provides structure:

• Positions grouped by similar market value or role evaluation

• Grades or levels established

• Ranges with “min-mid-max” markers set

Connects proficiency & performance

• Proficiency level established

• Objective performance evaluation process instituted

• Pay and performance linked


Best Practice #3: Use incentives to maximize the motivational impact of compensation $s (Short- and Long-term)

39

Business

Results

Satisfied

Customers

Motivated Workforce

Well designed incentive plans

Well designed incentive compensation drives achievement of business objectivesWell designed incentive compensation drives achievement of business objectives


Questions?


Mark Reilly, Director

312.488.6789

[email protected]

Brian Repsold, Director

312.488.6747

[email protected]

Thank you!


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To Continue the discussion we invite you to click here: https://thecfoalliance.org/discuss/compensation To access the full report : https://thecfoalliance.org/knowledge/1026

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