This article looks at the changes to CEO remuneration from 2010 to 2011.

Overall trends suggest a steady-as-she-goes approach to CEO remuneration. But within these overall trends is a range of practices by industry and company size that are more diverse than ever.

Incentives in 2011 were similar in frequency and size to those in 2010. One-third of CEOs have suffered a reduction in their total remuneration. Half received an increase in total remuneration, with two-thirds receiving fixed remuneration increases.

Reductions in TR were attributable to reductions in performance pay, particularly LTIs. Conversely, increases in TR were primarily attributable to increases in performance pay.

Larger companies tended to constrain fixed remuneration and maintain relatively large proportions of performance-based awards. Large company CEOs also experienced a shift from LTI to deferred STI, while smaller company CEOs experienced a shift from STI to LTI. The latter may be due to deferral of grant or plan implementation prior to the completion of legislative changes relating to equity-based remuneration.

Background

We analysed the change in remuneration between the 2010 disclosures and 2011 disclosures for the 132 individuals who occupied the same ASX 300 CEO role in 2011 as in 2010 (the number of CEOs included in the analysis is relatively low because the CEO had to be in the same role for the full two years, while the company remained in the ASX 300 for the same period – the market instability over this period caused a lot of change in the composition of the ASX 300).

Data is current to September 30 and was sourced from GuerdonData®.

Notes on methodology

CEOs were excluded if:

• Their remuneration was most recently disclosed prior to January 2011 
• They were not in the CEO role for the whole of the past two financial years 
• Their company was not in the ASX 300 for the whole of this period.

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 these assumptions are incorrect.

We have also treated negative accounting values disclosed for equity grants as zero, rather than as genuinely reducing the CEO’s remuneration, to avoid nonsense situations where a CEO with fixed pay of, say, $1.1 million has ‘total remuneration’ of $900,000 because there is a negative $200,000 equity value disclosed.

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

Our 2010 and 2011 analyses treat movement in un-hurdled remuneration that is not recurrent separately to fixed remuneration.

These definitions impact the rate of 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 categorisation of the fair value of the grant changes from ‘other un-hurdled remuneration’ to ‘LTI’, hence impacting the year-on-year trends.

Very small increases in fixed remuneration are assumed to be due to variations in payroll timing or statutory FBT expenses. These are included in aggregated statistics, but when calculating the proportion of CEOs whose remuneration increased, these are assumed to be zero changes.

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 sum or average, (remuneration weighted).

In the first case, the change in remuneration for each CEO has equal weighting in the analysis. In the second, 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-three companies in each quartile group.

Change in Remuneration from 2010 to 2011

The median incumbent-weighted increases in TFR and TR are 7.3% and 7.0% respectively. This represents a more rapid increase in TFR and TR compared with our results in 2010 that were 2.5% and 4.9% respectively (see HERE).

The following table summarises the incumbent-weighted increases in CEO remuneration between 2010 and 2011.

Overall 55% of CEOs received an increase in TR. Of this, 16% was attributable to increases in TFR. The remainder of the increase was attributable equally to increases in STIs and LTIs. Of the CEOs whose TR was reduced, the median change in TFR was 7.8%. This increase was negated by decreases in OUR, STI and LTI, of which reductions in LTI represented 56%. The 13% of CEOs whose TR was unchanged from 2010 to 1011 experienced little or no change in TFR, but did experience a shift from STI to LTI amounting to 5% of TR.

The following graph shows actual TFR for both 2010 and 2011. The log of market capitalisation is used to make the graph more readable.

The graph shows that overall dollar increases in fixed remuneration were similar across all company sizes. This resulted in proportionally larger increases for smaller companies, than for larger companies because the fixed remuneration tends to increase as market capitalisation increases. The following table summarises the median incumbent weighted increases by company size groupings.

The large increase in TR for Q2 sized companies is related to some large increases in LTIs. The Q2 sample includes a large proportion of very high market capitalisation growth resources companies.

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 2011 but no incentive was paid in 2010. Alternative analyses are included later in this paper.

The proportion of CEOs who received an increase in fixed remuneration was 68%, higher than the 2010 and 2009 proportion of 51% and 52%, respectively. Therefore, around one third received no increase, or a decrease in fixed pay. CEO STIs were more likely to decrease (39%) than increase (30%).

The proportion of CEOs whose remuneration increased, decreased or stayed the same is shown in the graph below. CEOs who did not receive OUR, STI or LTI in either year are included in the “Stayed the same (zero)” category.

The remuneration-weighted statistics vary from those above in Table 3. On a remuneration-weighted basis, the median TFR increased by 10% (9% in 2010) and the median TR increased by less than 1% (-4% in 2010). The 75th percentile TR has increased 3%. These figures are based on the change in aggregated data for same incumbent CEOs from 2010 to 2011.

Table 5 shows the remuneration-weighted median data for 2010 and 2011 and the percentage change, along with the change from our 2010 analysis for comparison. (The statistics relating to STIs, LTIs and OUR are based only on the incumbents who received them.)

Total remuneration and LTIs have remained consistent from 2010 to 2011, while OUR has continued its downward trend of recent years. STIs have reduced following a significant increase from 2009 to 2010. The following graph shows the inter quartile range for TFR, OUR, STI and LTI for both 2011 and 2010.

Change in Remuneration Structure

Overall, at risk remuneration has remained consistent, changing from 55% in 2010 to 54% in 2011. The small variations have resulted from smaller average LTI and OUR values and a reduction in the frequency of OUR awards.

The following table summarises the changes.

There was no significant change in the percentage of CEOs receiving STIs and LTIs across the full sample of CEOs. However the proportions did vary by company size. Note that some CEOs receive equity that we do not include in LTIs because it is either not at risk or not long term. There was a small shift from STIs to LTIs for smaller (Q1 and Q2) company CEOs and the opposite for larger (Q3 and Q4) company CEOs.

The graphs below illustrate the change in frequency in STI and LTI awards by company size.

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.

There has been a significant shift from un-hurdled equity to fixed remuneration for Q1 company CEOs. The change in remuneration mix also varied by sector, as seen in the graph below. Samples from the health care utilities sectors are small and the results should be interpreted with caution.

Most sectors experienced median increases in TFR (on an incumbent-weighted basis) between 3% and 9%. However, the median increase in the IT&T sector was 16% (21% in 2010) and CEOs in the energy sector experienced a median increase of 14%. The finance sector had the lowest median increase in TFR of 3.3%. The finance sector was the least likely to grant a fixed remuneration increase, with 53% of CEOs receiving an increase. The IT&T sector was the most likely to increase TFR, with 90% of CEOs receiving an increase. Energy sector CEOs had the highest median increase in TR of 13%, and the energy sector was the only one with median increases over 10%. The consumer and finance sectors had median changes in TR that were close to zero. The energy, finance and IT&T sectors experienced a shift in pay mix from LTI to STI. This may be the result of the trend to provide deferred STI in lieu of a portion of LTI. The consumer sector was the only sector to experience a significant decrease in both STI and LTI awards.

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