High-performing organizations tend to set the bar for all others. They perform well financially, attract and retain the best talent and exhibit best practices within the business as well as in their communities. Another way they stand out is through their executive pay programs.
We recently explored how enduring high-performing companies pay their executives. Our findings supported what we first discovered a decade ago: These companies follow a path less traveled.
We defined enduring high performers (EHPs) as S&P 500 companies with total shareholder return (TSR) that outperformed the overall S&P 500 about 90% of the time in the past decade. Based on these criteria, we identified 39 EHPs, with the majority (82%) being in the financial, industrial and information technology sectors. The remaining 18% are in the consumer discretionary, consumer staples, healthcare and materials sectors.
Notably absent were companies in communication services, energy, real estate and utilities. While these sectors have standout performers, certain characteristics (e.g., being value stocks, having relatively low volatility, offering high-dividend yields) have made it difficult for their TSR to consistently surpass the broader equities market in the past 10 years.
Our references to “the broader market,” “market” or “other companies” refer to all other S&P 500 companies, excluding EHPs. Target pay mix and long-term performance award payouts are based on CEOs in place for three full years.
When we first reviewed EHP executive pay programs in 2014, we found that EHPs:
Our most recent research confirms that EHPs continue with that same approach.
EHPs leverage incentive compensation to provide for greater risk and reward potential via a greater emphasis on performance-based pay and more upside and downside potential in incentive payout curves. In EHPs, CEOs’ target total direct compensation comprises a higher portion in short-term incentives (STI) plus long-term incentives (LTI) than in the broader market (Figure 1).
Additionally, EHPs provide more leveraged incentive payout opportunities. For example, the average STI maximum payout as a percentage of target award is 200% in the broad market, whereas the average maximum payout among EHPs is 215%. At the bottom of payout curves, the broad-market STI threshold payout is, on average, 22% of target while the average EHP STI threshold payout is just 13% (Figure 2).
Although EHP target incentive award levels are only moderately higher, their strong performance, including stock price appreciation, results in significantly higher realizable pay. For LTIs, EHPs’ payout as a percentage of target is 200% at the 75th percentile vs. 173% in the broader market; and EHPs realizable payout is 305% at the 75th percentile vs. 220% in the broader market (Figure 3).
Median numbers for formulaic payout show 134% for Market and 161% for EHP, 141% for Market and 258% for EHP for realizable payout and 15% for Market and 51% for EHP for stock price leverage (difference).
Series of bar charts reflecting significantly higher stock price leverage in EHP payout despite only moderately higher formulaic outcomes
EHPs seek focus by using fewer performance metrics and tend to encourage a longer-term perspective through longer LTI vesting. Whereas the number of STI metrics in the broad market is typically four or more, EHPs tend to use three or fewer STI metrics. Likewise, nearly half of companies in the broad market use three or more metrics for long-term performance plans (LTPP), while nearly half of EHPs use two metrics and about one-quarter use just one metric (Figure 4). EHPs also maintain longer LTI vesting periods (Figure 5).
For LTIs, EHPs apply greater emphasis on stock price appreciation by being more likely to use stock options. While the prevalence of time-vested restricted shares/units is lower among EHPs (68%) than other companies (75%), more EHPs (53%) use stock options than other companies (40%) (Figure 6).
We also observed that, while both EHPs and other companies typically grant stock options with a 10-year term, EHPs are more likely to use a seven-year term (Figure 7).
The close mirroring of these latest findings against our 2014 analysis indicates that these strategies are effective for EHPs given their profile and common characteristics (e.g., high growth, consistently strong financial performance). Although EHP practices are not market practices and they do not represent best practice for all companies, they are best fit for those companies.
EHP practices – or, for that matter, any other company’s practices – might not fit your organization and could be misaligned with your company’s characteristics and strategic imperative. Regardless of whether your organization is an EHP, a growth company or stable value play, publicly traded or privately held, or for-profit or not-for-profit, we encourage you to consider the following.
01
Challenge yourself with questions such as:
The answer to each could be “no” or “not now,” but asking these questions can be beneficial toward ensuring the pay program evolves in step with your organization’s strategy and performance journey.
02
Market practice often can be misconstrued as best practice. Because your organization competes under its unique service and/or product proposition, your executive pay program and performance measurement framework should support your organization’s strategic pillars and stakeholder interests. Don’t mimic what competitors do without adequate assessment.
03
Evidence supports the idea that when we generate best-fit solutions, we have permission from stakeholders to adopt them. Challenge conventional wisdom and be bold and innovative for your organization (Figure 8).
Source: Davis, Trey. The critical roles of innovation and creativity in designing high ROI rewards programs. WTW, Aug. 22, 2024.
Looking to high-performing organizations is a good place to begin thinking about your approach to executive pay programs. However, it is critical for you to also keep your organization’s unique strategy, lifecycle stage, culture and objectives top of mind when considering your path forward. Assessing what will be best fit and relevant to your executives against both EHP practices and market practices is a step in the right direction.
A version of this article appeared in Workspan on Feb. 20, 2025. All rights reserved, reprinted with permission.
