The More Things Change, the More They Stay the Same at the Top 200

Executive compensation is a tale of two cities in Meridian’s latest annual Top 200 survey – while the first half of the study is an exercise in almost total plan design homogeneity, the second half offers insights into the levers that can be pulled when the majority practice just doesn’t work for your organization because of a specific industry or performance challenge.

A few highlights that depict a different way of doing things:

Goal setting: When it comes to long-term plans, 93% of companies set multi-year goals, typically a 3-year cumulative goal such as TSR or EPS. But sometimes a company may need to stray from the norm, especially in volatile or difficult goal-setting environments (see the Center’s recent paper on this).

Meridian found that:

• 13% of the top 200 used multiple 1-year performance periods with goals set annually or at the beginning of a three-year period.
  
  
• To mitigate the concerns with annual goal setting in a long-term plan, 8% of companies require additional service vesting after the performance period (usually 1-3 years)

Relative TSR: It should come as no surprise that 78% of the Top 200 include TSR as a metric, but it is usually combined with another metric. Only 9% of companies use it as their only metric.

• What varies is the peer group: 33% compare against the general market, 32% use an industry specific index, 29% use a performance peer group and 11% use their compensation group.
  
  
• 39% use TSR as a modifier, which helps balance pay and performance while maintaining focus on financial performance. Modifiers can be structured so that any performance outside of target can impact the payout, or such that only the top and bottom quartile are impacted.
  
  
• About 39% of companies now have a negative TSR cap which caps payouts (usually at target) if absolute TSR is negative, regardless of relative performance.

Ownership and Holding: 78% of companies have a timing requirement for executives to meet share ownership thresholds (usually 5 years) and 69% have a holding requirement, either in addition to or instead of the timing requirement.

• Among companies with holding requirements: The most common (83%) is “hold until met.” However, 20% of companies have a hold only if non-compliant (i.e., executive fails to meet ownership guidelines in the allotted timeframe).
  
  
  • “Hold until met” policies are split between 100% of net shares (43%) and 50% of new shares (41%).
    
    
  • A few companies disclose more stringent policies: 7% use an “always in place” holding requirement and 4% hold until retirement.