A new Towers Watson study finds that high-performing companies' executive pay programs differ from others in the S&P 1500 in three key ways:
● They put more emphasis on stock options.
● They target pay levels at median market rates.
● They steer clear of the "one size fits all" tendency and evolve as the company grows and matures.
"We found that many high performers differentiate their pay programs in ways that many observers, including proxy advisory firms, would view unfavorably," says TW executive pay consultant Todd Lippincott, one of the authors of the study.
The emphasis on stock options was one of the more suprising findings, Lippincott notes.
"Stock options are often singled out as a symbol of short-term management thinking," he says. "It's interesting that companies that sustained performance over time have embraced them. The prominence of stock options among this group, with their stronger share price performance, also explains why they are able to deliver higher actual versus target compensation than the market."
Building In Flexibility
Towers Watson's study highlights the advantages of taking into account the company’s development stage when designing an executive pay program.
As an example, the study finds that early in their life cycle, high-performing companies use fewer annual incentive plan metrics—often just one or two such metrics—and then add more as they grow.
Likewise, early-life-cycle high-performers use fewer long-term incentives—often just one—and add more LTIs as they grow.
The findings "reinforce the importance of considering company size when assessing the appropriateness of pay programs," Lippincott says.
Moreover, he says, the findings suggest high-performing companies with annual revenue in the $500 million to $2 billion range are more likely than their similarly sized competitors to retain the less complex incentive practices associated with smaller start-ups and early-stage companies.
"In short, they keep it simple and focus on a few key goals,” said Lippincott.
The study—which analyzes the executive pay programs at the 50 companies with the most sustained and consistent outperformance in total shareholder return versus the S&P 1500 over the past 15 years—identified two other executive pay practices that high-performing companies use: a stronger long-term pay orientation; and the use of return metrics such as return on invested capital and return on equity when long-term performance plans are used.
Read the full Towers Watson Executive Compensation Bulletin.