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
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
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
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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