Mercer Reports CEO Total Direct Comp +9% in 2006   :  Published April  2007 All Rights Reserved


Mercer Reports CEO Total Direct Comp +9% in 2006

Year 2006 ended the second consecutive banner year for CEO compensation in the United States. CEO "total direct compensation" (on average) rose 9 percent in 2006 according to Mercer Human Resource Consulting -- a division of Marsh & McLennan. Median "total cash compensation" –-salary plus annual bonus-– rose to $2.6 million, slightly higher than the $2.4 million reported in 2005. The median increase for constant incumbent CEOs was 7.1 percent, the same rate as in 2005, according to Mercer on 10 April 2007.

The average pay increase for the typical worker in the United States was flat measured against inflation in 2006 with a national average household income of about $47,000.

CEO base salary increased 2.1 percent to a median of $995,000. Incumbent CEOs received a median increase of 4.1 percent, higher than the median increase of 3.6 percent in 2005. In 2006, about one quarter of the CEOs did not get a pay increase, which was fewer than 33 percent in 2005.

More than half of the companies granted performance shares that were earned only if performance goals are met. The number of CEOs receiving performance shares, including performance-contingent restricted stock, jumped from 111 in 2005 to 178 in 2006. The portion of the CEOs’ pay that was made up of performance-based shares and units jumped in the period 2005 to 2006 from 21 percent of the pay mix to 31 percent, while restricted stock was stable, rising slightly to 23 percent, and stock options dropped from 52 percent of the pie to just 46 percent. As recently as 2002, restricted stock made up 76 percent of CEO pay.

“We have been predicting the rise of performance-based equity awards for several years,” said Diane Doubleday, global leader of Mercer’s executive remuneration business.

“At the heart of shareholders’ expectations for pay aligned with performance is the structure of long-term equity programs, specifically programs that vest or pay out based on performance. As of 2006, the accounting rules that facilitate using performance-based equity were in effect for almost all companies. As a result, we now see a significant increase in performance shares and performance-contingent restricted stock. In addition, the new disclosure rules include previously unknown information about performance goals and targets,” Doubleday said.

Mercer concluded that setting CEO targets would be the new area of focus in 2007 as companies are forced to define how performance is being measured and rewarded, said Peter Chingos, a senior executive compensation consultant with Mercer. “The increased disclosure and need for analysis is also likely to cause many companies to simplify their programs. The process of preparing the Compensation Discussion and Analysis (CD&A) caused some companies to make changes and will probably prompt more to simplify and clarify the performance criteria in their compensation programs. This could range from tweaking the programs to making major changes to ensure clarity to external audiences.”

Meanwhile, Mercer concluded that shareholders continued to be unhappy with what they perceived was slow progress on reining in CEO pay. Several institutional investors have focused their efforts upon having a greater influence on compensation. Already in 2007 there are more than 60 proposals for a “say on pay” –- a proposal to put executive compensation to a non-binding vote by shareholders. In addition, shareholders have put forward more specific proposals to limit severance and require pay to be more tightly linked to performance. With majority voting for directors becoming widespread, directors who have been at the heart of controversy are more likely to hear shareholders’ dissatisfaction loud and clear.

And many believe that the disclosures were so lengthy and confusing that shareholders’ objectives have not been achieved. Mercer’s crystal ball anticipates further refinement of the disclosure rules before next year’s proxy season.

Mercer’s 2006 CEO Compensation Survey also examined trends in nine major industries. CEOs in the oil and gas sector, for example, had the highest level of total direct compensation among the nine industries analyzed, with a median of $11 million. But the median increase for constant incumbents in the oil and gas sector was the lowest of the industries analyzed, only 1.3 percent. Total shareholder return for companies in the oil and gas business was a strong 18.2 percent. The consumer goods sector had the lowest total shareholder return (7.8 percent,) but the constant incumbent CEOs in the group saw median increases in total direct compensation of 10.5 percent.

The Mercer Human Resource Consulting 2006 CEO Compensation Survey analyzed and reported on the most current publicly available compensation information as disclosed in the proxy statements of 350 large companies in the United States.


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