CEO Equity Compensation Recalibration - ERI Economic Research ...
CEO Equity Compensation Recalibration By Lyle Leritz, Ph.D., Research Manager and Malak Kazan, CECP, CCP, CBP, GRP, Senior Associate Research assistance provided by ERI Associates Ben Croudace, Wendy Garcia, and Fatima Rizvi
Executive compensation and company revenue are up in 2013. In fact, this is the first time since late 2007 that both Named Executive Officer compensation and company revenue showed year-overyear gains greater than 10% (ERI, 2013). Although mortgage delinquencies continue to be a concern, other economic indicators like interest rates, consumer spending, and economic expansion (GDP) are within acceptable limits, according to a recently published economic dashboard (Russell Investments, 2013). With economic recovery in sight, what trends have occurred relative to the performance of U.S. corporations and executive compensation pay practices? Are organizations rewarding their executives differently, or has compensation simply risen across the board? While it is clear that executive compensation is up, the purpose of this analysis is to examine the mix of equity compensation, specifically stock and option awards, and how each has changed over the period of 2007 through 2011. The analysis is based on financial and compensation data from publicly traded companies with revenues greater than one million dollars for 2007 and 2011 (at the time of this analysis, many companies had not filed 2012 reports). For each organization, the compound annual growth rate (CAGR) in revenue between 2007 and 2011 was calculated. CAGR is useful for measuring financial performance as it reduces year-to-year volatility that can render standard averages meaningless. Only organizations that had positive growth between 2007 and 2011 were included. The CAGR formula is shown below.
CAGR=
(
Ending Value Beginning Value
)
(
1
# of years
) -1
Figure 1 shows the CAGR formula applied to Winn-Dixie Stores, Inc., with revenues of $4.5 million in 2007 and $6.8 million in 2011, resulting in a 11% CAGR for revenue. Figure 1.
(
$6,880,800 $4,524,500
)(
1 4
) -1
= 11%
To provide an intuitive frame of reference for the analysis, organizations were grouped based on market capitalization (average stock price times the number of shares outstanding) for calendar year end 2011. As seen in Figure 2, three segments were created with ranges similar to what market analysts use. Figure 2.
MARKET CAP RANGE
$300M to $1B
SMALL
$5B+
$1B to $5B
MEDIUM
LARGE
Once the organizations were grouped by market capitalization, the top 100 companies in terms of revenue growth rate (CAGR) from each segment were selected for inclusion in the final analysis. All of the top 100 organizations in the medium and large segments were comprised of positive-growth companies. However, the top 100 in the small market segment included companies with negative growth. In order to maintain comparisons among companies with similar growth, the small segment was limited to the 59 positive-growth organizations. Across all 259 companies in the analysis, the overall average 4-year revenue growth was 11.50%. The large market segment had the highest average growth, while the small market segment had the lowest average growth, as shown in Table 1 below. Table 1. Revenue Growth by Market Segment SEGMENT
LOWEST
HIGHEST
AVERAGE
SMALL
Executive compensation and company revenue are up in 2013. In fact, this is the first time since late 2007 that both Named Executive Officer compensation and company revenue showed year-overyear gains greater than 10% (ERI, 2013). Although mortgage delinquencies continue to be a concern, other economic indicators like interest rates, consumer spending, and economic expansion (GDP) are within acceptable limits, according to a recently published economic dashboard (Russell Investments, 2013). With economic recovery in sight, what trends have occurred relative to the performance of U.S. corporations and executive compensation pay practices? Are organizations rewarding their executives differently, or has compensation simply risen across the board? While it is clear that executive compensation is up, the purpose of this analysis is to examine the mix of equity compensation, specifically stock and option awards, and how each has changed over the period of 2007 through 2011. The analysis is based on financial and compensation data from publicly traded companies with revenues greater than one million dollars for 2007 and 2011 (at the time of this analysis, many companies had not filed 2012 reports). For each organization, the compound annual growth rate (CAGR) in revenue between 2007 and 2011 was calculated. CAGR is useful for measuring financial performance as it reduces year-to-year volatility that can render standard averages meaningless. Only organizations that had positive growth between 2007 and 2011 were included. The CAGR formula is shown below.
CAGR=
(
Ending Value Beginning Value
)
(
1
# of years
) -1
Figure 1 shows the CAGR formula applied to Winn-Dixie Stores, Inc., with revenues of $4.5 million in 2007 and $6.8 million in 2011, resulting in a 11% CAGR for revenue. Figure 1.
(
$6,880,800 $4,524,500
)(
1 4
) -1
= 11%
To provide an intuitive frame of reference for the analysis, organizations were grouped based on market capitalization (average stock price times the number of shares outstanding) for calendar year end 2011. As seen in Figure 2, three segments were created with ranges similar to what market analysts use. Figure 2.
MARKET CAP RANGE
$300M to $1B
SMALL
$5B+
$1B to $5B
MEDIUM
LARGE
Once the organizations were grouped by market capitalization, the top 100 companies in terms of revenue growth rate (CAGR) from each segment were selected for inclusion in the final analysis. All of the top 100 organizations in the medium and large segments were comprised of positive-growth companies. However, the top 100 in the small market segment included companies with negative growth. In order to maintain comparisons among companies with similar growth, the small segment was limited to the 59 positive-growth organizations. Across all 259 companies in the analysis, the overall average 4-year revenue growth was 11.50%. The large market segment had the highest average growth, while the small market segment had the lowest average growth, as shown in Table 1 below. Table 1. Revenue Growth by Market Segment SEGMENT
LOWEST
HIGHEST
AVERAGE
SMALL
