Executive Compensation Trends. A Presentation for The CFO Alliance January 10, 2013

Transcription

1 Executive Compensation Trends A Presentation for The CFO Alliance January 10, 2013

2 Verisight delivers differences that count For decades we have been redefining the industry by delivering differences that are meaningful to our clients and that standout among competitors. Expert Independent Transparent Flexible services Good value 2

3 Agenda 2012/2013 CFO Alliance Executive Compensation Study Trend Data for the Middle Market Executive Compensation in the Middle Market Compensation Best Practices All Companies Should Know 3

4 2012 CFO Alliance Executive Compensation Study Trend Data for the Middle Market 4

5 2012/2013 Executive Compensation Trend Data for the Middle Market High quality, reliable executive compensation data for middle market organizations has been scarce. Verisight partnered with The CFO Alliance, McGladrey, Wake Forest University and Fordham University to develop and implement an executive compensation survey for mid-market organizations. 5

6 2012/2013 Executive Compensation Trend Data for the Middle Market Survey data was gathered via: The CFO Alliance website Verisight website Direct s to: CFO Alliance members Verisight clients Referrals from other survey partners 6

7 2012/2013 Executive Compensation Trend Data for the Middle Market Participating organization s headcount ranged from less than 50 to just over 4300 FTE Revenue size ranged from under $1M to $2.6B Budget size for the Non-Profit organizations ranged from less than $1M to nearly $200M Participating organizations came from 34 states, with the largest numbers coming from the East (92) and Midwest (75) regions Wide range of industries, with the largest participating industries coming from the Manufacturing and Non-Profit sectors 7

8 2012/2013 Executive Compensation Trend Data for the Middle Market The 2012 Executive Compensation Study covers a range of organizational and compensation variables, including: Industry Organization type/ownership structure Growth Financial performance Compensation practices 8

9 2012/2013 Executive Compensation Trend Data for the Middle Market The 2012 Executive Compensation Study provides actual compensation levels: Base salary Short-term variable compensation Total cash compensation Long-term variable compensation Total direct compensation 9

10 2012/2013 Executive Compensation Trend Data for the Middle Market High level observations include: 2013 base salaries for executives are projected to increase by 3%. Higher growth companies increase executive pay at a much faster rate than lower growth companies Total cash compensation, regressed against revenue, across all industries, yields the following pay levels: For companies with $150M in revenue, total cash compensation levels are: CEO - $600K COO - $430K CFO - $370K For companies with $50M in revenue, total cash compensation levels are: CEO - $450K COO - $330K CFO - $290K 10

11 2012/2013 Executive Compensation Trend Data for the Middle Market Factors Impacting Total Rewards Decisions Benefits Costs 65% 2011 Employee Retention Challenges Driving Employee Performance Attracting Talent 43% 48% 52% 2012 Benefits Costs Corporate Performance Employee Retention Attracting Talent Driving Employee Performance 58% 49% 48% 47% 44% Source: Verisight s 2012/2013 Compensation, Retirement and Benefits Trends Study 11

12 2012/2013 Executive Compensation Trend Data for the Middle Market Verisight collected 3-year trend data for revenue growth and associated changes in median compensation levels. All Executives Company Growth (36 months) Company Growth (median) Base Salary Change Total Cash Change <10% 1.1% 3.4% 3.4% 11-50% 23.6% 5.1% 9.8% 50%+ 84.6% 10.0% 15.0% 12

13 2012/2013 Executive Compensation Trend Data for the Middle Market Verisight collected 3-year trend data by company size and associated changes in compensation levels. All Executives Company Size Base Salary Change Total Cash Change Small ($0-$49m) 6.6% 11.4% Medium ($50-$199m) 5.1% 9.1% Large ($200m+) 4.3% 12.8% 13

14 2012/2013 Executive Compensation Trend Data for the Middle Market Verisight collected data on total cash compensation pay mix by position. Position Compensation $50M $250M $750M CEO Base 76% 68% 62% STI 24% 32% 38% COO Base 77% 70% 66% STI 23% 30% 34% CFO Top Engineering Top Legal Top Marketing Top Marketing & Sales Top Sales Base 80% 75% 72% STI 20% 25% 28% Base 82% 73% 67% STI 18% 27% 33% Base 87% 80% 76% STI 13% 20% 24% Base 90% 82% 77% STI 10% 18% 23% Base 89% 91% 91% STI 11% 9% 9% Base 76% 73% 71% STI 24% 27% 29% 14

15 2012/2013 Executive Compensation Trend Data for the Middle Market Verisight collected data on eligibility for short-term (STI) and long-term (LTI) incentive eligibility. Position STI Eligible LTI Eligible CEO 74.4% 36.1% COO 82.2% 35.1% CFO 80.3% 34.7% 15

16 2012/2013 Executive Compensation Trend Data for the Middle Market Verisight collected data by company size for total cash levels of executive positions versus CEO (cascade). 16

17 Executive Compensation in the Middle Market 17

18 Mid-Market Executive Compensation Trends Mid-size organizations are often characterized by a singular product/service focus, dissimilar to large public companies. Ongoing economic challenges force owners/stakeholders to redefine business model focus - Anticipate and respond to changing needs of customers - New products and services and close scrutiny of feasibility Renewed focus on drivers of long-term shareholder value - Longer range view of business model - Increased innovation, flexibility, agility - Change in what constitutes performance; higher visibility - Increased focus on human capital management, performance and pay Increased prevalence of LTIPs in mid-size organizations 18

19 Mid-Market Executive Compensation Trends Increased LTIP prevalence is also due to: Demographics M U.S. workers 55 or older in Willing to leave employer for better benefits and/or long-term incentives Retirement plan shortfall - 3% of privates with D.B. plans compared to 17% of all employers Talent war Enterprise value will ultimately drive upward PEGs Board cross-pollination Ownership/management succession 19

20 Mid-Market Executive Compensation Trends Use long-term incentives to reward long-term contribution and promote stability : Most common long-term incentive arrangements for privately-held organizations Performance unit plans Stock appreciation rights/phantom stock Restricted stock Most common long-term incentive arrangements for public companies Stock Restricted stock Stock options (less popular in current environment) 20

21 Mid-Market Executive Compensation Trends Ownership succession 50% to 75% of privately-held companies will undergo ownership transition in the next 5 to 15 years 60% to 70% do not have a comprehensive ownership and succession plan - Mid-size publics will likely develop/update succession plans for Dodd Frank compliance purposes Absence of a comprehensive continuity plan represents a significant risk to shareholders/owners, customers, financiers, potential suitors Increased need for management succession plans in mid-sized organizations 21

22 Mid-Market Executive Compensation Trends Say on pay in the middle market Executive compensation program should Establish strong pay-performance linkage Align with management succession plan Remove potential barriers to ownership transition and strategic transactions Enable recruitment, motivation, retention of key executives from larger companies to drive future growth 22

23 Mid-Market Executive Compensation Trends Middle market designs - public Public company approaches Pick up some proxies!! 23

24 Mid-Market Executive Compensation Trends Middle market designs - private 3 Big Factors - Presence/absence of ownership on the executive team Alignment of owner/stakeholder goals and executives efforts - Shareholder/owner desire to utilize equity for compensation purposes Dilution - Suitability of share price as a vehicle for compensation purposes Linkage between share value and company performance 24

25 Mid-Market Executive Compensation Trends Middle market designs - private Presence/absence of ownership on the executive team Quite prevalent Ownership transition Offspring Learning/has learned the business Reports to non-executive owners on the Board Serves on executive team with non-owner outsiders 25

26 Mid-Market Executive Compensation Trends Middle market designs - private Heterogeneity of executive team Unique to closely held public/private businesses One or more executives also part of ownership constituency Remainder of executives not Owner/executive already in an LTIP Challenge: Create a level playing field for all executives 26

27 Mid-Market Executive Compensation Trends Middle market designs - private Shareholder/owner desire to utilize equity for compensation purposes Use of equity is now fairly rare» Movement/disposition of company equity is largely driven by estate planning and family business agreements and transactions» Generational transition already increases dilution» Reticence to expand ownership to non-owners/non-family» Tax structure (C-Corp, etc.)» Availability of stock shares 1. Classes of stock 2. Voting/non-voting 27

28 Mid-Market Executive Compensation Trends Middle market designs - private Suitability of share price as a vehicle for compensation purposes - Linkage between: Financial performance Enterprise value 1. Third party 2. Formulaic 3. Arm s length Share value 28

29 Plan Design Examples Stock Appreciation Rights/Phantom Stock Company grants phantom shares with a base value equal to the company s current book value The phantom shares have value to the participant as the book value increases The participant receives the difference in share value over the base value (i.e., net value) as a cash payment at a specified date or upon achieving certain performance criteria 29

30 Mid-Market Executive Compensation Trends Middle market designs - healthcare Achievement of System strategic goals will only be accomplished via functional integration across operating-entities and/or departments. - Linkage between: System Operating Margin Clinical Quality Patient Safety 30

31 Performance Unit Plan Example Performance Unit Plan The performance unit plan (PUP) provides executives with specified award opportunities in return for achieving specific predetermined long-term corporate goals. The amount of earned awards depends on the degree to which the goals are achieved. At the beginning of the performance period, organization will establish three or four year performance goals, often aligned with financial and/or non-financial business objectives. Participants are awarded units based on their potential contribution to attaining the three/four year objectives. The value of a unit is based on achieving the predetermined corporate objectives. At the end of the three/four year period, participants receive earned rewards to the extent the predetermined goals are achieved. A new three/four year performance cycle is begun at the beginning of the fourth/fifth year respectively, or concurrent three/four year performance periods are established each year. 31

32 Performance Unit Plan Payout Example Payouts are made at the end of the three/four year performance period based upon the achievement of established goals (this example assumes Target performance) Patient Satisfaction Operating Margin Quality Composite Threshold TBD TBD TBD TBD 3% $0 $200 $400 $600 $800 4% Rank 17 $150 $350 $700 $825 $950 5% $183 $400 $750 $883 $1,017 3% $217 $450 $800 $942 $1,083 4% Rank 16 $250 $500 $850 $1,000 $1,150 5% $300 $550 $900 $1,058 $1,200 3% $350 $600 $950 $1,117 $1,250 4% Rank 15 $400 $650 $1,000 $1,175 $1,300 5% $450 $675 $1,025 $1,200 $1,342 3% $500 $700 $1,050 $1,225 $1,383 4% Rank 14 $550 $725 $1,075 $1,250 $1,425 5% $600 $750 $1,100 $1,275 $1,450 3% $650 $775 $1,125 $1,300 $1,475 4% Rank 13 $700 $800 $1,150 $1,325 $1,500 5% $900 $1,200 $1,400 $1,500 $1,600 32

33 PUP Granting Strategy Grants are planned to be made annually with overlapping performance periods Grants will be made at the discretion of the CEO and/or Board Grant Payout Grant Payout Grant Payout 33

34 Discussion Questions What are the most noticeable trends you are seeing in executive compensation below the Fortune 500? Do mid-market companies handle executive compensation differently than large corporations, and how? How are companies managing limited budgets to drive reward the workforce and drive strategic objectives? 34

35 Compensation Best Practices All Companies Should Know 35

36 Best Practice #1: Defining a Total Rewards Philosophy is key Organization Strategies Pay & Reward Objectives Organization Style & Culture Information & Support Systems Total Rewards Philosophy Stakeholder Concerns & Objectives Competitive Pay & Reward Policies Industry, Legislation, Market & Economic Development Learning and Career Development Work-Life Recognition Benefits Short-Term Incentives Base Salary Long-Term Incentives 36

37 Best Practice #1: Defining a Total Rewards Philosophy is key Percent of Organizations Positioned At Market Base Salary 71% Incentive Compensation 47% Health and Welfare 52% Retirement 53% 37

38 Best Practice #2: Base compensation management should be market-based and performance driven Begin by developing a Compensation Administration Framework Reflects value of position: External competitiveness analyzed Internal equity evaluated (could be formula driven) Provides structure: Positions grouped by similar market value or role evaluation Grades or levels established Ranges with min-mid-max markers set Connects proficiency & performance Proficiency level established Objective performance evaluation process instituted Pay and performance linked 38

39 Best Practice #3: Use incentives to maximize the motivational impact of compensation $s (Short- and Long-term) Well designed incentive plans Motivated Workforce Satisfied Customers Business Results Well designed incentive compensation drives achievement of business objectives 39

40 Questions? 40

41 Thank you! Mark Reilly, Director Brian Repsold, Director