September 13, 2013
As an interesting counterpoint to the raft of recent articles criticizing executive pay, this week the Wall Street Journal reported the results of its study showing that the “push to more closely align chief executive pay with company performance is showing signs of working.” The study, conducted by pay data firm Equilar, Inc., found that while nearly two-thirds of companies met or exceeded their performance goals for stock awards granted between 2008 and 2010, CEOs on average only received about 4% more shares than targeted. The results showed that the trend toward incorporating performance-based equity into long-term incentive plans has helped more closely align pay and performance, and the article noted that while "the trend toward performance-linked stock hasn't had a big impact on average pay levels . . . it is creating losers as well as winners." University of Chicago Finance Professor Steve Kaplan highlighted this fact, noting that varying payouts mean “real pay for performance” and that with regard to seemingly reasonable targets set by boards, “sometimes [CEOs] hit it, sometimes they don’t.” As the article notes, a joint study by the Journal and pay consulting firm Hay Group reported this year that performance-based stock now comprises 27.4% of total CEO pay, up from 18.8% in 2008. This growth in performance-based equity, which often combines an element of company financial performance with share price appreciation, responds to shareholders' preferences that pay be tied to performance and aligned with shareholders' interests.