02/12/2013

This article looks at the changes to CEO remuneration from 2012 to 2013. Almost half of CEOs received no increase in total remuneration, while overall trends suggest that fixed pay increases and short-term incentives (STIs) are harder to come by but LTIs are increasing in value and frequency.

At 3.3%, the median increase in fixed pay is more subdued than the 7.7% movement in 2012. The number of CEOs who received an increase was also lower than the previous year, 52% of CEOs received an increase in fixed pay in 2013 compared to 70% in 2012.

The median increase in total remuneration was 2.8%. Half of CEOs received an increase in total remuneration, but 37% suffered a reduction. There was in increase in the occurrence of long-term incentives (LTIs) and a reduction in the occurrence of STIs in some sectors.

Reductions in total remuneration (TR) were primarily attributable to a reduction in the frequency in STIs (but not STI quantum when it was paid). Increases in TR were attributable to increases in the size and frequency of both STIs and LTIs. There was a measureable difference in shareholder returns of companies whose CEO total remuneration went down and that of companies whose CEO total remuneration increased or stayed the same.

Larger companies tended to constrain CEO fixed remuneration and provide modest increases to performance-based awards. Smaller company CEOs experienced a shift from STIs to LTIs.

**The sample**

We analysed the change in remuneration between the 2012 and 2013 disclosures for the 156 individuals who occupied the same ASX 300 CEO role in 2013 as in 2012 (the number of CEOs included in the analysis is lower than 300 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). In effect, the study measures the reward changes to survivors. The sample has not been diluted with data from relatively new incumbents, who are generally internal promotions, and who start at levels of pay lower than their predecessor. 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. Company size was defined using market capitalisation as at 20 November 2013, and the companies were grouped according to size into quartiles.

Tables 1 and 2 summarise the segmentation. There are 39 companies in each size-based quartile group.

Table 1: Company size quartiles based on market capitalisation

Quartile | Market Capitalisation Range |

Q1 | Up to $350 million |

Q2 | $350 million to $950 million |

Q3 | $950 million to $2.7 billion |

Q4 | Over $2.7 billion |

Table 2: Company industry sector

Sector | Number of same incumbent CEOs | Average Market Capitalisation |

Consumer | 34 | $3,212m |

Energy | 11 | $2,079m |

Financials | 19 | $18,179m |

Health Care | 12 | $4,869m |

Industrials | 34 | $1,769m |

IT & Telcos | 11 | $11,602m |

Materials | 28 | $1,684m |

Utilities | 7 | $3,296m |

**Change in Remuneration from 2012 to 2013**

The median incumbent-weighted increases in total fixed remuneration (TFR) and TR are 3.3% and 2.8%, respectively. This represents a smaller rate of increase in TFR and TR than our 2012 results of 7.7% and 9.5%, respectively (see HERE

Table 3 summarises the incumbent-weighted increases in CEO remuneration between 2012 and 2013.

Table 3: Incumbent-weighted increases

Percentile | Change in TFR | Change in TFR+STI | Change in TR |

25 | 0.0% | -10.6% | -8.8% |

50 | 3.3% | 2.4% | 2.8% |

75 | 7.9% | 17.4% | 21.3% |

Overall, 52% of CEOs received an increase in TR. Of this, 11% was attributable to increases in TFR. The remainder of the increase was attributable to increases in STIs (45%) and LTIs (30%) and one very large un-hurdled equity grant – other unhurdled remuneration (OUR).

For the CEOs whose TR fell, the median change in TFR was an increase of 0.7%. The drop in TR is primarily attributable to reductions in performance pay, with LTI accounting for 17% and STI for 82% of the reduction. The frequency of STI payments within this group dropped from 88% in 2012 to 57% in 2013 and the median size reduced by 5%.

The 12% of CEOs whose TR was unchanged from 2012 to 2013 experienced a small increase in TFR (2%) along with a shift from STI to LTI.

52% of CEOs received an increase in fixed remuneration in 2013, which is lower than the 70% whose fixed pay increased in 2012. Fixed remuneration decreased for 10% of CEOs and did not change for the remaining 38%.

CEO STIs were about as likely to decrease (42%) than they were to increase (40%), while LTIs were more likely to increase (50%) than decrease (25%).

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’.

Figure 1: Percentage of CEOs whose remuneration increased, decreased or stayed the same

**Does company size make a difference?**

The largest companies awarded the smallest change in remuneration from 2012 to 2013.

Figure 2 shows actual TFR for both 2012 and 2013. The log of market capitalisation is used to make the graph more readable.

Figure 2: 2013 and 2012 fixed remuneration by company size

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

Table 4: Incumbent-weighted median increases by company size

Company Size | Average Market Capitalisation | Median Change in TFR | Median Change in TFR+STI | Median Change in TR |

Q4 | $17,783m | 1.5% | 2.3% | 0.2% |

Q3 | $1,720m | 4.4% | 1.0% | 4.3% |

Q2 | $624m | 4.5% | 2.6% | 2.8% |

Q1 | $229m | 3.3% | 2.9% | 1.2% |

The CEOs of the largest companies (Q4) experienced the smallest overall change in remuneration. The frequency of incentive awards was identical to that reported in 2012. For these companies, STIs have remained consistent as a percentage of TFR and LTIs have increased from an average of 90% to 96% of TFR.

The CEOs of the smallest size group (Q1) experienced a reduction in the size of both STIs and LTIs. The frequency of STIs has reduced from 72% in 2012 to 62% in 2013. This group has a significant proportion of mining companies and the slowing in this sector is the most likely cause of these reductions. Fixed remuneration increases have more than compensated for the reduction in incentive payments, resulting in a median increase of 1.2%

**Variations across Sectors**

There is significant variation in median pay increases across the various GICS sectors. Table 5 summarises median incumbent-weighted increases by sector.

Table 5: Incumbent-weighted median increases by company sector

Sector | Average Market Capitalisation | Median Change in TFR | Median Change in TFR+STI | Median Change in TR |

Consumer | $3,212m | 2.1% | 1.0% | 5.3% |

Energy | $2,079m | 4.8% | 8.2% | 5.4% |

Financials | $18,179m | 0.0% | 2.1% | 4.3% |

Health Care | $4,869m | 5.2% | 7.3% | 23.0% |

Industrials | $1,769m | 3.8% | -6.1% | -6.3% |

IT & Telcos | $11,602m | 4.1% | 8.7% | -3.0% |

Materials | $1,684m | 3.0% | 6.6% | 0.6% |

Utilities | $3,296m | 4.0% | 7.8% | 14.5% |

The finance sector produced the lowest median increase in TFR. The Health Care sector CEOs experienced the highest median increase in both fixed and total remuneration, although this is based on a small sample size (12). The increase in total remuneration of Health Care CEOs was largely attributable to LTIs, explaining 83% of the change in TR.

The Industrials sector experienced a significant reduction in total remuneration. This was due to a drop in the frequency of STIs from 85% to 62% in 2013, although the size of the STIs was similar. The Materials sector had a similar reduction from 75% to 57%, but the average STI increased by over 30%.

**Relationship with performance**

Overall, shareholder returns appear to be related to increases in total remuneration. Table 6 shows the average total shareholder return and ROE for the CEOs whose remuneration went down, up or stayed the same.

Table 6: Incumbent-weighted median increases by company size

Change in CEO TR | Median Change in TFR | Median Change in TR | Average ROE | Average TSR |

Went down | 0.7% | -13% | 8% | 7% |

Stayed the Same | 3.6% | 0% | 7% | 33% |

Went up | 5.5% | 22.6% | 15% | 102% |

** **

**Overall ranges of pay variation are narrowing**

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

Figure 3 contrasts the 2013 and 2012 inter-quartile ranges for TFR, STI and LTI.

Figure 3: Inter-quartile ranges in remuneration for 2013 and 2012

A significant reduction in the number of large STI awards has narrowed the range of TR in 2013, despite the slight widening in the TFR range.

**Notes on methodology**

CEOs were excluded if:

- Their remuneration was most recently disclosed prior to January 2013
- 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 2012 and 2013 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 (less than 3%) 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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