Pay-for-Performance at Smaller-Cap Companies

It’s no secret that performance has been a key element in CEO pay for a while now. What may be surprising is that, according to a recently released study by Willis Towers Watson (“CEO Pay at S&P 1500 Companies: 2019”), LTI (long term incentive) compensation across all CEOs of S&P 1500 companies is now 50% comprised of performance based awards. It appears that pay-for-performance is gaining continued traction within smaller cap companies.

Some highlights from Willis Tower Watson’s article on their study (“Small-cap companies jump on the CEO performance pay bandwagon, study finds” – Michael Bowie, November 21, 2019) include:

Small-cap companies experienced the most pronounced shift in granting CEO performance awards, increasing from 61% in 2017 to 67% in 2018, while S&P 500 and S&P 400 companies held steady in 2018 at 88% and 79%, respectively. This growing trend in the S&P 1500 reflects investors’ determination to align pay with financial performance and growth and to take a long-term view about delivering value to stakeholders that include investors and employees.

LTI realized: The value of LTI earned — the combination of time-vesting awards vesting, stock options exercised and performance plan payouts — grew 13% at the median in 2018, but at a much lower rate than the previous year when the median earned grew 33%.

Performance-award payouts: Looking specifically at performance awards, the average payout was 110% of target based on the underlying shares or units granted for performance periods completed in 2018. Strong market performance over the recently completed performance cycle led to substantial value gains because of stock price growth. Consequently, the average realized value from payouts for awards completed during 2018 was 157% of target.
 
It's a solid assessment that performance is continuing to become a (the?) key driver in CEO pay. This means that companies need to ensure their metrics and goals are reasonable, understandable, and measurable. Knowing the underlying mechanics of each performance award - such as the different payout scenarios - is essential in making sure the goal of aligning pay with performance is maximized. 

Check out the full Willis Towers Watson article to gain more insight into CEO performance pay across small-cap companies. 

-Jennifer