More companies adding ESG measures to incentive plans
ARLINGTON, VA, June 9, 2022 — Chief executive officers (CEOs) at the largest U.S. corporations saw their total compensation increase at the fastest pace since 2014, according to a new analysis of proxy disclosures by WTW (NASDAQ: WTW), a leading global advisory, broking and solutions company. Significantly larger annual incentive payouts and higher values of long-term incentives granted last year contributed to the big increase in total pay.
The WTW analysis found total pay for CEOs jumped 15.7% in 2021, sharply higher than the 3.2% median increase in 2020. It’s also the largest increase for CEOs since 2014 when total pay increased around 16%. Total pay, as reported in the Summary Compensation Table (SCT) in company proxy statements, includes base salary, actual annual and long-term cash bonuses, the grant-date value of long-term incentives (such as stock options, restricted stock and long-term performance shares), the value of perquisites, earnings from deferred compensation and the change in value of executive pensions.
The analysis, based on 500 S&P 1500 companies that filed proxies disclosing 2021 pay by the end of April, noted that CEO salaries increased 2.0% in 2021, compared with a 1.1% increase in 2020. Annual bonuses soared 39.3% last year, compared with a 6.1% decline in 2020. More than eight in 10 companies (82%) paid annual bonuses that were at or above target levels compared with just 45% in 2020. In fact, annual bonuses averaged 145% of target in 2021, up from 97% in 2020. The value of target long-term incentives jumped 9.1% in 2021, compared with a 5.5% increase at the median in 2020.
“Last year was a bounce-back year for CEO compensation as well as a good year financially for many companies and shareholders,” said Don Delves, North America practice leader of Executive Compensation at WTW. “Companies continue to manage their executive pay programs carefully. The fact that CEO pay accelerated in a year when revenue growth, earnings and return to shareholders shone demonstrates that CEOs are being rewarded for performance.”
The separate analysis of 310 S&P 500 companies found growing interest in linking executive incentive awards to ESG measures. Ninety-two companies added an ESG measure to their 2021 or 2022 annual incentive plans, including 42 that did not previously have an ESG measure. Additionally, 22 companies added an ESG metric to their long-term incentive plans. All but one of these companies did not previously use an ESG measure in their long-term plans.
“Responding to stakeholder concerns, more companies are tying incentive award goals to achieving various ESG initiatives, such as net-zero carbon emission commitments or inclusion and diversity recruitment goals. We expect this trend to continue as part of companies’ broader efforts related to risk management, brand value enhancement, and recruiting and retention,” said Kenneth Kuk, senior director, Work & Rewards, WTW.
The 12th year for mandatory say-on-pay votes is showing a relatively positive response to executive pay programs in general, but with targeted opposition to above-market pay packages driven by one-time awards. Based on WTW’s research, among the 1,003 of the Russell 3000 companies that disclosed their shareholder voting results by May 20, shareholder support averaged 90%, and 97% of proposals received majority support. This is roughly the same level of shareholder support as in previous years.
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