This article looks at the changes to CEO remuneration from 2011 to 2012 for CEOs who managed to keep their job. The overall trend is consistent with the change from 2010 to 2011. That is, for those CEOs who survived from one year to the next, the rate of increase was significantly greater than inflation.

At 7.7%, the median increase in fixed pay is close to the 7% movement in 2011. But not all CEOs received an increase – consistent with last year, thirty per cent of CEOs did not receive an increase in fixed pay.

The situation is similar when considering total remuneration (i.e. fixed pay plus incentives). Sixty per cent of CEOs received an increase in total remuneration (TR), but one-third suffered a reduction in their TR.

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

And size does appear to matter. Larger companies tended to constrain CEO fixed remuneration but increase performance-based awards. Smaller company CEOs experienced a significant reduction in the size of LTIs.

But we suggest you look a little closer before leaping to any conclusions regarding your own CEO’s pay. Within these overall trends, there is a diverse range of practices by industry and company size.

The sample

We analysed the change in remuneration between the 2011 and 2012 disclosures for the 145 individuals who occupied the same ASX 300 CEO role in 2012 as in 2011 (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®.

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 as at 21 November 2012, and the companies were grouped according to size into quartiles.

Tables 1 and 2 summarise the segmentation. There are around thirty-six companies in each quartile group.

Change in Remuneration from 2011 to 2012

The median incumbent-weighted increases in total fixed remuneration (TFR) and TR are 7.7% and 9.5% respectively. This represents a similar rate of increase in TFR and TR to our 2011 results of 7.3% and 7.0%, respectively (see HERE)

Note that the median for the most recent year is likely to be overstated because the requirement for CEOs to be in the role for at least two years excludes the new incumbent (and therefore least experienced) CEOs, who could reasonably be expected to have lower remuneration than more experienced CEOs. This is particularly the case if the CEO is an internal promotion.

Table 3 summarises the incumbent-weighted increases in CEO remuneration between 2011 and 2012.

Overall, 60% of CEOs received an increase in TR. Of this, 43% was attributable to increases in TFR. The remainder of the increase was attributable to increases in STIs (28%) and LTIs (29%).

 For the CEOs whose TR fell, the median change in TFR was an increase of 4%. The drop in TR is primarily attributable to reductions in performance pay, with LTI accounting for 54% and STI for 45% of the reduction.

The 8% of CEOs whose TR was unchanged from 2011 to 2012 experienced a small increase in TFR (3%) along with a shift from STI to LTI.

70% of CEOs received an increase in fixed remuneration in 2012, which is similar to the 68% whose fixed pay increased in 2011. The proportion of CEOs receiving an increase in fixed pay appears to be stabilising after the post-GFC lows of 51% and 52% in 2010 and 2009, respectively. Fixed remuneration either fell or did not change for the remaining 30% of CEOs.

CEO STIs were just as likely to decrease (36%) as they were to increase (35%), while LTIs were more likely to increase (39%) than decrease (31%).

The proportion of CEOs whose remuneration increased, decreased or stayed the same is shown in Figure 1. CEOs who did not receive STI or LTI in either year are included in the “Stayed the same – zero” category. ‘OUR’ is ‘other un-hurdled remuneration’.

 Does company size make a difference?

Incumbent-weighted increases were not consistent across all sized companies – the trend (best fit) lines suggest that overall dollar increases in fixed remuneration were larger for large companies.

Figure 2 shows actual TFR for both 2011 and 2012. The log of market capitalisation is used to make the graph more readable.

Generally, the source of pay increase for larger companies was weighted to STI and LTI. The source of pay increases for smaller companies was fixed pay and STI.

Table 4 summarises the median incumbent-weighted increases by company size groupings.

The most notable variation in remuneration increases is seen in the smallest companies analysed. The CEOs in this group received relatively large increases in TFR but the lowest increase in TR. This is due to a significant decrease in the size of LTIs granted. The proportion of CEOs receiving LTI awards was the same for both years, but the average award halved. There was a significant reduction in the number of companies awarding very large LTIs in 2012. In 2011 almost 20% of smaller company CEOs received LTIs with a value exceeding their TFR. In 2012 this dropped to 5.6%.

In all other company size categories, LTIs were more likely to increase than to decrease.

The smaller companies are dominated by resources companies and recorded significantly lower average levels of performance (based on total shareholder returns and return on equity) than the other size groupings.

The finance sector produced the most modest increases in TFR, with a median change of just 0.1%. The energy sector had the highest median TFR increase at 19%.

Overall ranges of pay variation are narrowing

The range of fixed pay and total remuneration is narrowing across the ASX300.

Figure 3 contrasts the 2012 and 2011 inter-quartile ranges for TFR, STI and LTI.

 

Figure 3: Inter-quartile ranges in remuneration for 2012 and 2011

A significant reduction in the number of large LTI awards has narrowed the range of TR in 2012, despite the wider range of TFR.

Conclusions

Overall, CEO pay is still increasing at a pace exceeding inflation. In larger companies the rate of increase is highest in performance pay, while in smaller companies it is in fixed pay and STIs.

Notes on methodology

CEOs were excluded if:

• Their remuneration was most recently disclosed prior to January 2012
• 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 in 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 2011 and 2012 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 have used the incumbent-weighted method in our analysis.

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