Enduring High-Performing Companies Pay Executives Differently From Other Companies in S&P 1500, Towers Watson Study Finds
July 24 2014 - 8:05AM
Business Wire
Study reveals high performers emphasize stock options,
targeted performance measures
High-performing companies design their executive compensation
programs differently from many other organizations, according to a
new study by Towers Watson (NYSE, NASDAQ: TW), a global
professional services company. The study found that high-performing
organizations, unlike other companies in the overall S&P 1500,
place a greater emphasis on stock options, target compensation
levels at market median rates and do not take a “one size fits all”
approach to their executive pay program design.
“We conducted this study to see if companies with truly
sustained high performance follow practices that differ from other
companies,” said Todd Lippincott, North America executive
compensation leader at Towers Watson. “The short answer is they do.
In fact, we found that many high performers take approaches and
differentiate their pay programs in ways that many observers,
including proxy advisory firms, would view unfavorably.”
The study examined the executive compensation programs at 50
companies with the most sustained and consistent outperformance in
total shareholder return versus the S&P 1500 over the past 15
years. The study found some of the following practices that
differentiate high-performing companies.
Stock options are an integral part of long-term incentive
(LTI) program design.
While there is strong movement in the market to adopt long-term
performance plans, high-performing companies place a greater
emphasis on stock options, both in terms of prevalence and LTI mix.
Among these companies, stock options represent about 50% more of
the LTI mix than in the broader market. In addition, the high
performers place less emphasis on long-term performance plans
(e.g., LTI plans that have explicit performance measures such as
relative total shareholder return).
“This is one of the more surprising findings. Stock options, in
particular, are often singled out as a symbol of short-term
management thinking. It’s interesting that companies that actually
sustained performance over time have embraced them. The prominence
of stock options among this group, with their stronger share price
performance, also explains why they are able to deliver higher
actual (versus target) compensation than the market,” said
Lippincott.
High performers target market median compensation and
leverage incentive plans.
The study revealed that target pay opportunities (target total
direct compensation) were generally very similar between high
performers and the overall market median, adjusted for company
size. However, despite the median target opportunity, their actual
realizable pay exceeded market median levels, often significantly —
by 43% among large companies and 28% for small companies. Greater
upside in bonus and LTI payouts supported these enhanced payouts.
The study noted that this finding supports the point that effective
program design can ensure appropriate rewards for high performance;
it also raises questions about the need for companies to adopt
above-median target pay philosophies.
Compensation designs evolve as a company grows and
matures.
The study reinforced the importance of considering a company’s
development stage when determining the appropriate executive
compensation design. For example, early in their life cycle, high
performers used fewer annual incentive plan metrics (often one or
two measures) and added metrics as they grew. Similarly, high
performers used fewer LTI vehicles earlier in their life cycles —
often only one — and added vehicles as they grew.
“The implications of these findings are significant. First, they
reinforce the importance of considering company size when assessing
the appropriateness of pay programs. Often, we see commentary about
pay that doesn’t consider the company’s development stage. Second,
these findings suggest that high-performing companies with revenues
of $500 million to $2 billion are more likely than their similarly
sized competitors to retain the less complex incentive practices
associated with smaller start-ups and early-stage companies. In
short, they keep it simple and focus on a few key goals,” said
Lippincott.
The study also identified other pay practices that
high-performing companies emphasize, including the use of return
metrics (e.g., return on invested capital, return on equity) when
long-term performance plans are used and a stronger long-term pay
orientation.
More information about the study is available at
http://www.towerswatson.com/en/Insights/Newsletters/Global/executive-pay-matters/2014/Executive-Compensation-Bulletin-Enduring-High-Performing-Cos-Take-Road-Less-Traveled-in-Exec-Pay
About Towers Watson
Towers Watson (NYSE, NASDAQ: TW) is a leading global
professional services company that helps organizations improve
performance through effective people, risk and financial
management. The company offers consulting, technology and solutions
in the areas of benefits, talent management, rewards, and risk and
capital management. Towers Watson has more than 14,000 associates
around the world and is located on the web at towerswatson.com.
Towers WatsonMedia Contacts:Ed Emerman, +1
609-275-5162eemerman@eaglepr.comorBinoli Savani, +1
703-258-7648binoli.savani@towerswatson.com
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