2014 CEO pay trends
01/12/2014
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This article looks at the changes in remuneration for incumbent ASX CEOs from 2013 to 2014. In summary, forty per cent of CEOs received no increase in total remuneration. Overall trends suggest that increases in fixed pay and short-term incentives (STIs) are modest but long-term incentives (LTIs) are increasing in value.

At 3.3%, the median increase in fixed pay is exactly the same as the increase we reported for 2013. The 51% of CEOs receiving an increase was consistent with 2013.

However, the median increase in total remuneration was 6.1%, significantly higher than the 2.8% reported for 2013. 60% of CEOs received an increase in total remuneration, but 27% suffered a reduction. There was a small increase in the occurrence of STIs and an increase in the size of LTIs.

Reductions in total remuneration (TR) were primarily attributable to a reduction in the frequency and size of STIs and LTIs. Increases in TR were attributable to increases in the size and frequency of both STIs and LTIs. Overall, increases in total remuneration appear to be related to the shareholder return performance of companies.

Larger companies tended to constrain CEO fixed remuneration and provide modest increases to performance-based awards, with increases in LTI more likely. Smaller company CEOs were more likely to experience an increase in STIs.

The increase in LTIs may be related to both the constraints on fixed pay movements and the restoration of LTI awards that were reduced when deferred STIs were introduced during the past few years.

The sample

We analysed the change in remuneration between the 2013 and 2014 disclosures for the 152 individuals who occupied the same ASX 300 CEO role in 2014 as in 2013. The number of CEOs included in the analysis is less 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. More than 25% of the ASX 300 were not there at this time last year. In effect, the study measures the reward changes to survivors. The sample has not been diluted with data from relatively new incumbents, who are often 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 a 30-day average market capitalisation as at 27 November 2014, and the companies were grouped into quartiles according to size. 

Tables 1 and 2 summarise the segmentation.  There are 38 companies in each size-based quartile group.

Table 1: Company size quartiles based on market capitalisation

Quartile

Market Capitalisation Range

Q1

Up to $440 million

Q2

$440 million to $1 billion

Q3

$1 billion to $4 billion

Q4

Over $4 billion

Table 2: Company industry sector

Sector

Number of same incumbent CEOs

Average Market Capitalisation

Consumer

34

$4,196m

Energy

9

$2,361m

Financials

27

$18,841m

Health Care

16

$2,163m

Industrials

26

$2,880m

IT & Telcos

14

$6,386m

Materials

21

$2,647m

Utilities

5

$4,217m

Change in Remuneration from 2013 to 2014 

The median incumbent-weighted increases in total fixed remuneration (TFR) and TR are 3.3% and 6.1%, respectively.  This represents consistent rates of TFR increase, but a higher rate of increase in TR than our 2013 results of 3.3% and 2.8%, respectively (see HERE)

Table 3 summarises the incumbent-weighted increases in CEO remuneration between 2013 and 2014.

Table 3: Incumbent-weighted increases

Percentile

Change in TFR

Change in TFR+STI

Change in TR

25th

0.0%

-2.7%

-3.9%

50th

3.3%

3.9%

6.1%

75th

10.1%

16.6%

18.6%

Overall, 61% of CEOs received an increase in TR. For these CEOs, the median same-incumbent increase in TR was 15%. The overall (remuneration weighted) average increase in TR was 21%, of which 14% was attributable to increases in TFR. The remainder of the increase was attributable to increases in STI and LTI. The median increase in STI was 13% and the frequency of STI payments increased from 75% to 88%. The median increase in LTIs was 31%, but there was no change in the frequency of LTIs.

For the CEOs whose TR fell, the average reduction was 10%. The median change in TFR was an increase of 1.1%. The drop in TR is primarily attributable to reductions in performance pay, with LTI accounting for 40% and STI for 60% of the reduction. The frequency of STI payments within this group decreased from 93% in 2013 to 76% in 2014, with a median reduction in STI of 23%. The frequency of LTI payments within this group decreased from 95% in 2013 to 88% in 2014, with a median reduction in LTI of 34%.

The 13% of CEOs whose TR was unchanged from 2013 to 2014 experienced no increase in TFR but there was a shift from STI to LTI.

51% of CEOs received an increase in fixed remuneration in 2014, which is consistent with our 2013 findings. Fixed remuneration decreased for 11% of CEOs and did not change for the remaining 38%.

CEO STIs were more likely to increase (48%) than they were to decrease (33%). LTIs were significantly more likely to increase (53%) than decrease (28%).

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.

 

CEO%202014%201.png

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 2013 to 2014.

Figure 2 shows actual TFR for both 2013 and 2014 (the log of market capitalisation is used to make the graph more readable) and confirms that TFR tends to have a direct and positive correlation to company size.

CEO%20pay%202014%202.png

Figure 2: 2014 and 2013 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

Q1

$273m

3.9%

4.5%

4.5%

Q2

$686m

4.0%

4.0%

9.1%

Q3

$2,089m

4.7%

5.0%

3.3%

Q4

$21,833m

1.9%

2.5%

7.5%

The CEOs of the largest companies (Q4) experienced the smallest percentage change in TFR. The frequency of incentive awards was similar for both years, however, there was a significant increase in the size of LTI awards. The median same-incumbent increase in LTIs was 18%.

The CEOs of the smallest size group (Q1) experienced an increase in the size of STIs, which is a reversal of our 2013 findings, with a median increase of 9.3%. The frequency of STIs has remained consistent. Fixed remuneration increases have more than compensated for the reduction in incentive payments, resulting in a median TR increase of 4.5%

The 9.1% increase in TR for the Q2 group (second smallest) companies, is primarily attributable to a 9% increase in the median change in LTI value.

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

$4,196m

4.4%

2.2%

3.7%

Energy

$2,361m

6.4%

14.9%

1.3%

Financials

$18,741m

2.7%

6.2%

8.7%

Health Care

$2,163m

8.9%

5.3%

6.5%

Industrials

$2,880m

1.7%

3.2%

3.1%

IT & Telcos

$6,386m

3.0%

7.3%

5.6%

Materials

$2,647m

2.4%

1.8%

11.2%

Utilities

$4,217m

3.0%

-2.6%

3.0%

The Industrials sector produced the lowest median increase in TFR. The Health Care sector CEOs experienced the highest median increase in TFR and the Materials sector experienced the largest increase in total remuneration. The increase in total remuneration for Materials CEOs was largely attributable to larger LTIs. The same was true in the Utilities and Financials sectors.

Most sectors show an increase in the frequency of incentive payments. Most notably, an increase in the frequency of STIs in the Consumer and Energy sectors.

Relationship with performance

Overall, increases in total remuneration appear to be related to the level of shareholder returns. 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 and annual performance

Change in CEO TR

Median Change in TFR

Median Change in TR

Average ROE

Average TSR

Went down

1.1%

-9.8%

7%

-8%

Stayed the Same

1.2%

0.0%

10%

16%

Went up

4.4%

15.3%

11%

22%

Overall ranges of pay are steady

The range of performance pay and total remuneration has narrowed over the past two years, but is now relatively steady across the ASX300.

Figure 3 contrasts the 2014 and 2013 inter-quartile ranges for TFR, STI and LTI.

CEO%20Pay%202014%20p2.png

Figure 3: Inter-quartile ranges in remuneration for 2014 and 2013

Notes on methodology

CEOs were excluded if:

  • Their remuneration was most recently disclosed prior to January 2014
  • 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
  • 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 million has ‘total remuneration’ of $800,000 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.

In 2014, there were very few instances of un-hurdled equity. One-off grants such as sign-on arrangement and IPO grants have been excluded from the analysis. Regular equity awards that form part of guaranteed pay are included in TFR. Some companies have previously included an un-hurdled element in their LTI grants, but now have performance tests on the whole grant. In these instances, the 2013 un-hurdled award has been included in the LTI for consistency.

Very small increases in fixed remuneration (less than 2.9%) 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 have “stayed the same”.

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.  Unless stated otherwise, we have used the incumbent-weighted method in our analysis.

© Guerdon Associates 2021
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