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Article | Executive Pay Memo North America

Comparing individual CEO performance scores to corporate results

By Michael Wach and Mark Chen | December 26, 2024

A study of the use and outcomes of individual CEO performance components in North American annual incentive plans
Executive Compensation
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How should a CEO's individual performance be assessed and rewarded? To what extent can a CEO’s individual performance, and therefore compensation, differ from broader organizational outcomes? These are critical questions faced by every board and compensation committee. Although there is no definitive answer, we present a summary of North American market practices for annual incentive plans and a framework that our clients find valuable when addressing these questions

Prevalence of individual performance assessment in annual incentive plans

To evaluate and reward CEO performance, 52% of the companies within the S&P 500 and 50% of the S&P / TSX 60 incorporate an individual weighting or modifier in their annual incentive plans. A weighted approach assigns part of the overall score to individual performance. On average, the weighting is 26% in the US and 29% in Canada for CEOs. A modifier on the other hand is applied to the overall enterprise performance to adjust the annual incentive payout up or down based on individual performance (typical modifiers are +/- 10% to 25%). Among S&P 500 companies, modifiers are slightly more common than weighted components. However, 80% of those S&P/TSX 60 companies noted above use a weighted approach.

Actual 2023 annual incentive plan performance

So, how did CEOs perform relative to their corporate scorecards in 2023? In short, better.

  • Among US companies1 disclosing both corporate and individual weighted outcomes, 47% of CEOs received an individual performance score (125% of target, on average) that exceeded their company’s corporate scorecard (120% of target, on average).
  • Comparably, 61% of S&P / TSX 60 CEOs, where disclosed2, achieved higher individual (120% of target) than corporate performance scores (105% of target).

168 US S&P 500 companies disclosed weighted scores for both corporate and individual performance
223 Canadian S&P/TSX 60 companies disclosed weighted scores for both corporate and individual performance

CEOs less likely to be scored below target

In addition to higher average annual incentive scores, individual CEO outcomes were much less likely to be scored below target or, for performance modifiers, to decrease CEO outcomes:

  • 31% of the US companies noted above had below-target corporate scores versus only 13% of individual CEO scores and performance modifiers were four times more likely among S&P 500 companies to increase than decrease CEO annual incentive outcomes
  • Meanwhile, 39% of S&P/TSX 60 corporate scorecards were below target but only 26% of CEOs received below target scores on their weighted component. No Canadian company used a modifier to decrease the annual bonus

Cases for and against an individual CEO component in an annual incentive plan

Although the use of individual components in annual incentive plans for CEOs is evenly split in North America, high-performing organizations typically possess well-defined CEO performance appraisal processes, fostering a shared understanding of performance expectations and outcomes. Whether such CEO performance appraisal should be formalized in the annual bonus depends on how each company views the following cases for and against:

Rationale for an individual CEO component:

  • Promotes a shared understanding of performance expectations and key activities for the year, while underscoring the significance of these initiatives both internally and externally
  • Formalizes the timing and frequency of performance discussions, which some companies find helpful to ensure a robust performance appraisal process is followed
  • Not all companies utilize balanced scorecards with multiple performance metrics. Some organizations focus almost exclusively on financial performance. In such, cases, an individual component drives accountability for broader operational performance that support long-term value creation

Rationale against an individual CEO component:

  • Introduces the potential for misalignment between individual and corporate performance outcomes. Companies without an individual CEO component often consider the corporate scorecard to be the best reflection of CEO performance for the year
  • “Is it worth the stress?” - individual incentive weightings, though typically a small component of total pay, are highly visible and often sensitive
  • Given the sensitivity of individual appraisals, scores for the CEO and their direct reports are often “clustered” together as companies are reluctant to make sharp distinctions, especially negative ones
  • In the long term, individual CEO performance should be reflected in the company’s share price, representing a much more meaningful portion of overall compensation

In closing

How should we interpret these results? Are CEOs being over-rewarded or evaluated less strictly? We do not believe this is the case.

We believe the key question is whether a CEO’s personal contributions are accurately reflected in the annual incentive plan. Companies with bonus plans that focus mainly on financial performance and less on other metrics benefit from including an individual component which helps hold CEOs accountable for overall operational performance. In contrast, companies with a more balanced annual scorecard gain less from having an individual component.

Enhancing the link between executive pay and performance is a core focus of WTW’s Executive Compensation and Board Advisory Practice. For expert assistance, please connect with your local WTW consultant or contact one of the authors below.

A version of this article appeared in Workspan on December 19, 2024. All rights reserved, reprinted with permission.

Authors


Senior Director, Work & Rewards
WTW
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Senior Director, Executive Compensation and Board Advisory
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