04/10/2024
In some respects Stoic philosophy has it right. Stuff happens. But how much ‘amor fati’ an executive has a right to enjoy may depend on the extent that the stars align for annual incentive payouts over time. Should some be resigned to little or no payouts over time? Or are there Masters of the Universe that defy fate, or just get lucky, with sustainably high annual payouts?
According to ACSI, it more likely for an ASX 100 CEO to lose their job than to receive no STI payout (see HERE).
To provide a benchmark based on longer term historical results we analysed ASX 200 CEO annual short term incentive (STI) outcomes for the period FY18-FY23.
The table below illustrates STI outcomes as percentage of maximum each year at the average and median.
Table 1: ASX 200 CEO STI outcome as % of maximum
Statistic |
FY18 |
FY19 |
FY20 |
FY21 |
FY22 |
FY23 |
Average |
64% |
54% |
46% |
71% |
69% |
59% |
Median |
70% |
60% |
47% |
81% |
72% |
61% |
Some investors and proxy advisors may suggest that there is little variation in STI outcomes between each year and potentially a weak link between pay and performance.
However, while the median STI outcome was at least 60% of maximum each year (with the exception of the COVID-impacted FY20), this does not necessarily suggest that STI outcomes are persistently high at the company level.
After all, it is possible that companies with vesting outcomes that were above median one year could have outcomes that are below median the following year, with the overall median being unchanged year to year.
To assess whether STI outcomes are persistent on the company level, we followed companies’ CEO incentive outcomes through time. For illustrative purposes we ranked companies into quintiles based on FY18 STI outcomes. We then followed the median STI outcome within each FY18 cohort through to FY23. This is illustrated in the below figure.
Figure 1: ASX 200 CEO median STI outcome per FY18 quintile
The analysis suggests that STI outcomes are not persistently high or low at the company level. For example, the median in the cohort with the highest outcomes in FY18 (Q5) ended up second lowest in FY23.
Companies in the next highest FY18 cohort (Q4) were the exception to the rule, with the median outcome in that cohort being above the total sample median each year and ending up highest in FY21-FY23. Better to be good than outstanding.
The results illustrate a regression towards the mean over the period. That is, STI outcomes that are far from average will be followed with an outcome that is closer to the average. Mean reversion is a powerful force for company performance and shareholder returns over time. It is no surprise that STI outcomes show the same pattern if incentives vary with performance.
We also analysed median STI outcomes at the sector level for the same period. Despite the above results, perhaps there are some sectors that consistently pay high or low STI awards? As illustrated in the figure below this appears to not be the case either:
Figure 2: ASX 200 CEO median STI as % of maximum by sector
In summary, ASX 200 CEO STI awards can vary considerably at the company and sector level in any one year, but incentive outcomes tend to revert to the mean over time. Philosophically this is so interesting, although we fear there are few interested in a treatise from us on executive pay and philosophy. So we just stick, for now, in providing great client advice and giving the facts in articles like these.
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