Despite the improved economic conditions, more than one third (37%) of CEOs have suffered a reduction in their total remuneration between 2009 and 2010. Half received an increase in total remuneration, with almost as many receiving fixed remuneration increases.

 

Larger companies tended to constrain fixed remuneration and award larger performance-based awards.

 

The 2010 statistics confirm that “at risk” remuneration, which reduced in 2009, has recovered in line with earnings performance.

 

Background

 

This article looks at the changes to CEO remuneration from 2009 to 2010 for the 153 ASX 300 CEOs who occupied the same CEO position in 2009 and 2010 and for whom 2010 disclosures (up to September 30 financial year end) were available from GuerdonData^®.  We analysed the change in remuneration between the 2009 disclosures and 2010 disclosures for these CEOs.

 

Notes on methodology

 

CEOs were excluded if they were not in the CEO role for the whole of the past two financial years

 

The following abbreviations are used throughout this document:

 

·          TFR: Total Fixed Remuneration including salary, fringe benefits and superannuation

·          OUR: Other Un-hurdled Remuneration, which includes sign-on payment, retention payments and un-hurdled equity

·          STI: Short Term Incentives, which is pay contingent on performance measured within a 12 month period

·          LTI: Long term Incentives, which is pay contingent on performance over a period greater than 12 months (typically 3 or more years)

·          TR: Total Remuneration, which is the sum of the above

 

Guerdon Associates applies a rigorous and consistent definition of STIs and LTIs throughout our analysis.  Therefore our results will be different from analyses reported in the media that have assumed that all equity compensation is ‘long-term’, or that companies’ own definitions of ‘long-term’ are consistent across companies.  Both of these assumptions are incorrect.

 

To qualify as LTI, the award must be subject to a performance hurdle to be considered an incentive and must have a performance period longer than 12 months (to be considered ‘long-term’.  Therefore, time vested grants of equity and retention incentives are not regarded as at-risk (i.e. variable with performance) remuneration.  Additionally, incentives with just a 12-month performance period are regarded as STIs, even if the award is deferred for a longer period.

 

Our 2010 analysis includes movement in un-hurdled remuneration that is not recurrent separately to fixed remuneration

 

These definitions impact the market movement in remuneration.  If, for example, an organisation has made un-hurdled (time vested) option grants in the past and subsequently introduces performance hurdles, then the fair value of the grant changes from other un-hurdled remuneration to LTI, hence impacting the year-on-year movement.

 

There are two ways of estimating the change in remuneration over time.  One is to analyse the individual percentage change in remuneration (incumbent weighted) and the other is to analyse the change in aggregated statistics, like median or average, (remuneration weighted). Using the first method, the change in remuneration for each CEO has equal weighting in the analysis.  Using the second method, the changes in the remuneration of highly paid CEOs will have a stronger influence on the outcomes than the same remuneration change in a lower paid CEO.  We use both methods in our analysis.

 

Companies were grouped using two criteria.  The first was company size and the second was the Global Industry Classification System (GICS) sector and industry.  Company size was defined using market capitalisation and the companies were grouped according to size into quartiles. 

 

The following tables summarise the segmentation.  There are thirty-eight or thirty-nine companies in each quartile group.

 

 

 

Change in Remuneration from 2009 to 2010

 

The median increases in TFR and TR are 2.5% and 4.9% respectively.  This represents a decrease in the rate of movement in TFR and an increase in the rate of movement in TR compared with the movements in our 2008 to 2009 analysis of 7.0% and 1.5% respectively (see HERE).

 

The following table summarises the incumbent-weighted increases in CEO remuneration between 2009 and 2010.

 

 

The following graph shows actual TFR for both 2009 and 2010. The log of market capitalisation is used to make the graph more readable.

 

 

The graph shows that smaller companies were more likely to increase fixed remuneration than large companies.

 

The following table reinforces this finding.  It summarises the median incumbent weighted increases by company size groupings.

 

 

The large increase in TR for Q2 sized companies is due to some very large individual increases in un-hurdled equity in OUR.

 

The smallest (Q1) company CEOs were only half as likely as larger company (Q2-Q4) CEOs, to receive an increase in STI and one third as likely to receive an increase in LTI. Of the smallest company CEOs, 26% received an increase in STI and 13% received an increase in LTI.

 

Changes in STIs and LTIs cannot be calculated accurately using incumbent-weighted data because it is not possible to calculate a sensible increase when an individual is paid an incentive in 2010, if no incentive was paid in 2009.  Alternative analyses are included later in this paper.

 

The proportion of CEOs who received an increase in fixed remuneration was 51%.  This is around the same as the 2009 proportion of 52%.  Therefore, around half either received no increase or a decrease in pay.

 

The proportion of CEOs whose remuneration increased, decreased or stayed the same is shown in the graph below.  CEOs who did not receive an OUR, STI or LTI in either year are included in the “Stayed the same (zero)” category.  The remarkable finding is the number of CEOs for whom fixed pay fell from 2009 to 2010.

 

 

The remuneration-weighted statistics vary from those above in Table 3.  The median TFR increased by 9% (12% in 2009) and the median TR decreased by 4%, the same amount by which it increased in 2009.  These movements are based on the change in aggregated data for same incumbent CEOs from 2009 to 2010.  The following table contains the median data for 2009 and 2010 and the percentage change, along with the change from our 2009 analysis for comparison.  (The statistics relating to STIs, LTIs and OUR are based only on the incumbents who received them.)

 

 

Most components of remuneration have remained consistent from 2009 to 2010. The exceptions are STIs, which have increased in size, and un-hurdled remuneration, which has decreased. Although the median TR has reduced slightly, the 75^th percentile (Q3) has increased significantly, reflecting some significant increases in STI payments.

 

The following graph shows the inter quartile range for TFR, OUR, STI and LTI for both 2009 and 2010.

 

 

 

Change in Remuneration Structure

 

Overall, at-risk remuneration has increased from 49% of TR in 2009 to 53% of TR in 2010.  This represents an increase in both STIs and LTIs and an increase in the frequency of STIs from 62% to 65%.  The historical structures for 2006 to 2008 are included for reference, however, the analysis is based on 75 CEOs for whom there are five years of data disclosed. Therefore the sample is not identical to that used in the 2009/2010 analysis. The following table summarises the changes.

 

 

The percentage of CEOs receiving LTIs across all company size groups remained constant at 58%. Note that some CEOs receive equity that we do not include in LTIs because it is either not at-risk or not long-term.

 

Only CEOs from the smallest company grouping (Q1) were less likely to receive a STI in 2010 than in 2009. The graph below illustrates the change.

 

The following graph shows the proportion of remuneration that is TFR, OUR, STI and LTI over a two-year disclosure period by company size quartiles.

 

 

The significant change in Q1 company CEO STIs is largely due to an extraordinarily large STI received by one CEO in 2009. If this individual is excluded the percentage of TR that is STI in 2009 reduces from 26% to 19%.

 

The change in remuneration mix also varied by sector, as seen in the graph below.

 

Most sectors experienced increases in average TFR of between 4% and 8%. However, the increase in the IT&T sector was 21% and CEOs in the financial sector experienced a small decrease of -1%.

 

The sectors that were most likely to grant increases in TFR and TR were the consumer, IT&T and utilities sectors, with around two-thirds receiving an increase. The finance sector was the least likely to grant a fixed remuneration increase, with only 5% of CEOs receiving one. The energy sector was least likely to increase TR, with only 21% of CEOs receiving one.

 

On average, CEOs in the finance and utility sectors received the largest increase in STIs, averaging 54% each. In 2009 we noted that CEOs in the energy sector experienced a large increase (35%) in STIs from 2008 to 2009. This has now been corrected by a 25% decrease in STI (on average). The IT&T sector experienced the largest reduction in STI size (-29%) although this is based on a relatively small sample of eight CEOs. It is possible that the larger than average TFR increases are compensating for this reduction in STIs.

 

In addition to receiving the largest increases in STIs, the financial and utilities sectors also experienced the largest increase in LTI awards, averaging 67% and 55% respectively. The energy and health care sectors experienced the largest reduction in LTI value, averaging -19% and -18% respectively. 

 

Health care, utilities and IT&T have small sample sizes (9, 7 and 8 respectively) and cannot reliably be used to make inferences about remuneration trends.

© Guerdon Associates 2024

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