Long-Term Incentive Plans Show Considerable Stretch, Study Finds

Despite critics’ claims to the contrary (see Bloomberg story below), a new CAP study found long-term incentive goals included significant stretch from 2015-2020. The study, which analyzed 120 large companies (median revenue: $36 billion) across a range of industries, found that over this five-year period, the degree of stretch resulted in:

• A 95% chance of achieving threshold performance;
  
  
• A 70% chance of achieving target performance; and
  
  
• A 20% (in other words, once in five years) chance of achieving maximum performance.

 The study found, as expected, that fewer companies achieved target performance in 2020, due to COVID – however, pay bounced back in 2021. Also as expected, payout distributions differ by industry. According to the report, health care, pharmaceutical and insurance companies pay at or above target 80-85% of the time (compared to 70% for all industries) while consumer goods and retail companies achieved target only around 50% in recent years. 

 Given the current level of scrutiny of incentive plan metrics and targets by investors and proxy advisors, it is important to review historical trends around achievement of threshold, target and maximum performance for a company versus its peers. ISS has put considerable resources into developing tools to analyze the “rigor” of performance goals and will highlight companies that pay at maximum too often. Particularly now, when some companies are facing the need to reduce targets after a banner year, ensuring that goals are set with sufficient stretch is critical to avoid unwanted attention.