Total pay for CEOs at the nation's largest corporations only grew slightly in 2012, suggesting that boards of directors may be taking a more conservative approach to compensation, according to a new analysis of company proxy statements by professional services company Towers Watson & Co.
The Towers Watson analysis, released April 16, found that total pay for CEOs increased 1.2 percent in 2012, down from the 6.7 percent median increase CEOs received in 2011. Total pay, as reported in company proxy statements, includes base salary, actual annual and long-term cash bonuses, and the grant-date value of long-term incentive stock options, restricted stock and long-term performance shares.
Salary increases alone declined slightly—from 3 percent in 2011 to 2.8 percent in 2012—but annual bonuses to CEOs dropped by 16 percent at the median over last year. That bonus figure surprised Towers Watson's Todd Lippincott, managing director of executive compensation in the Americas.
"The magnitude of the decline is somewhat surprising, in the sense that the markets performed quite well last year," Lippincott said. "It seems like companies were taking more of their cues from the operating financial performance vs. the share price performance."
The Towers Watson analysis is based on 270 Standard & Poor's Composite 1500 companies that filed proxies disclosing 2012 pay by late March.
Even though total pay took a slight hit, some analysts argue that many of the factors driving up U.S. CEO pay for decades remain firmly in place.
The CEO "pay increase may have slowed, but the point is it's still an increase," said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. "And the issue is how did the CEO do relative to everyone else at the company?"
The AFL-CIO also released its most recent analysis of executive pay, showing that CEOs made 354 times the typical worker in 2012. The analysis found CEOs of S&P 500 Index companies received $12.3 million, on average, last year. That compares to an average worker's pay of $34,645.
The AFL-CIO analysis also found that CEO-to-worker pay ratios have dramatically increased over the years. Thirty years ago, CEOs were paid 42 times that of rank-and-file workers in the U.S., AFL-CIO President Richard Trumka said in releasing organization's report.
Elson released a report this year aimed at finding the true source of rising CEO pay. He said one key factor is that company boards often base the CEO's pay on peer groups who are often not true peers.
In addition, boards often choose to target total compensation to the 75th or 90th percentiles of those peers and rarely target below the median, Elson said. But in most cases, he said, CEO skills are not truly transferable from one company to the next, and most often CEOs are hired from within the companies anyway, making benchmarking unnecessary.
"As long as you continue comparing to peer groups and target the 90th percentile ... you're going to continue to see" a CEO pay increase, Elson said. "I think you need to use a peer group only after you've arrived at a pay process that begins internally. You shouldn't start the process by looking elsewhere."
Still, Towers Watson's Lippincott said there are positive signs from their CEO pay analysis. Namely, more companies are looking to tie CEO pay to performance-based, long-term incentive plans. Forty-four percent of S&P companies now have performance plans in place, according to the Towers Watson analysis. Total return to shareholders is the most popular performance metric used to determine long-term incentive plan payouts.
"In general, there's more rigor and more hurdles associated with delivering high pay than there was three or five years ago," Lippincott said. "Now, CEOs need to outperform their peers in order for long-term incentives to vest. I think that's been a positive development in aligning pay and performance in America in a more transparent and objective way."