Consulting firm Mercer released its annual study of CEO pay, the summary of which is below:

"The drive for responsible executive pay continues to gain traction as new proxy rules require companies to disclose the value of compensation, benefits and perquisites.  While the median change in CEO total direct compensation (salary, bonus and long-term incentives) was 8.9%, corporate net income increased by 14.4%, up from 13% in 2005, and total shareholder return was 15.1%, more than double the 6.8% return in 2005. Companies heard the message that pay has to be linked to performance:  Over half of the companies granted performance shares – shares that are earned only if performance goals are met – according to the Mercer Human Resource Consulting 2006 CEO Compensation Survey. The annual survey of the latest proxy filings of 350 large public companies was published today in The Wall Street Journal.


The long-awaited total compensation numbers are in, disclosed for the first time this year: According to the Mercer 350 study, total compensation (total direct compensation plus benefits and perquisites) is not as eye-popping as expected.

 

Mercer reports a median total of $8.2 million.  The new elements totaled less than $1.3 million at the median or approximately 15% of the median CEO package.  Most of the added value came from the annual increase in pension values; the reported median increase was approximately $1.0 million.


CEO base salary increased to a median $995,000 after having been at $975,000 for two years. Constant incumbent CEOs received a median increase of 4.1%, higher than the median increase of 3.6% in 2005. In 2006, about one quarter of the CEOs did not get a pay increase; boards were tougher in 2005, when one third of the sample did not get a pay increase.


Median total cash compensation – salary and annual bonus – rose to $2.6 million, slightly higher than the $2.4 million reported in 2005.  The median increase for constant incumbent CEOs was 7.1%, the same rate as in 2005.  An increase in total cash is not surprising given strong corporate performance.  Median net income rose 14.4%.


The big story this year is that, as predicted, long-term incentives (LTI) are being linked to performance, Mercer's survey found. The number of CEOs receiving option grants declined from 192 in 2005 to 185 in 2006, and the number of CEOs receiving restricted stock grants declined from 181 to 172 in the same period.  However, the number of CEOs receiving performance shares, including performance-contingent restricted stock, jumped from 111 in 2005 to 178 in 2006.  The portion of the CEOs' LTI pay that was made up of performance-based shares and units jumped in the period 2005 to 2006 from 21% of the LTI pay mix to 31%, while restricted stock was stable, rising slightly from 22% to 23%, and stock options dropped from 52% of the LTI pie to just 46%. As recently as 2002, stock options made up 76% of CEO LTI pay.


"We have been predicting the rise of performance-based equity awards for several years," said Diane Doubleday, global leader of Mercer's executive remuneration business. "At the heart of shareholders' expectations for pay aligned with performance is the structure of long-term equity programs, specifically programs that vest or pay out based on performance. As of 2006, the accounting rules that facilitate using performance-based equity were in effect for almost all companies. As a result, we now see a significant increase in performance shares and performance-contingent restricted stock.  In addition, the new disclosure rules include previously unknown information about performance goals and targets."


"Target-setting will be the next area of focus, as companies are forced to define how performance is being measured and rewarded," said Peter Chingos, a senior executive compensation consultant with Mercer. "The increased disclosure and need for analysis is also likely to cause many companies to simplify their programs. The process of preparing the Compensation Discussion and Analysis (CD&A) caused some companies to make changes and will probably prompt more to simplify and clarify the performance criteria in their compensation programs. This could range from tweaking the programs to making major changes to ensure clarity to external audiences."


Did shareholders get what they wanted?  They continue to be unhappy with what they perceive as slow progress on reining in CEO pay. Several institutional investors have focused their efforts on having a greater influence on compensation.  This year there are more than 60 proposals for a "say on pay" – a proposal to put executive compensation to a non-binding vote by shareholders. In addition, shareholders have put forward more specific proposals to limit severance and require pay to be more tightly linked to performance. With majority voting for directors becoming widespread this year, directors who have been at the heart of controversy are more likely to hear shareholders' dissatisfaction loud and clear.


And many believe that the disclosures were so lengthy and confusing that shareholders' objectives have not been achieved.  Mercer's crystal ball anticipates further refinement of the disclosure rules before next year's proxy season."