Should Bar Be Lifted on CEO Bonuses? -- WSJ

By Theo Francis and Joann S. LublinFeaturesDow Jones Newswires

Investors have pressed for years to get companies to tie executive pay more closely to performance, and boards have increasingly complied. But now, some investors are questioning just how high they set the bar.

Median pay for chief executives of S&P 500 companies reached $11.7 million in 2016, up from $10.8 million a year earlier and a postrecession high, according to a Wall Street Journal analysis. Roughly 60% of their pay came from stock and stock-option awards, most of which are tied to performance targets.

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Companies have wide latitude in choosing performance hurdles. Take FedEx Corp. For more than a decade, the company has used the same 12.5% target for average earnings-per-share growth as a threshold for its executives to earn their target long-term incentive payments -- even as Wall Street analysts have forecast substantially higher growth at the start of many of those years.

FedEx has gone on to exceed the target in four of the past five performance periods and has paid out the maximum cash bonus in three. Chief Executive Fred Smith was paid $16.8 million last year, up 21% from a year earlier.

A FedEx spokesman said the target reflects the company's long-term goal of 10% to 15% annual per-share earnings growth and serves to reward executives for building long-term shareholder value.

"It has to be the right measure and the right achievement level," said Glenn Booraem, who handles corporate governance for more than $2 trillion of U.S. equity investments at mutual-fund giant Vanguard Group.

Mr. Booraem said he is concerned some boards set the bar too low, allowing CEOs to earn "premium payouts in the absence of compelling performance relative to the market."

Last year about 250 S&P 500 companies paid CEOs cash incentives above the levels they promised for meeting certain performance goals, averaging 46% higher, according to data from Institutional Shareholder Services, the biggest U.S. proxy-advisory firm. Meanwhile, 150 paid bonuses below the target.

Annual bonuses have long been tied to performance. Stock and stock-option awards, however, were often awarded at set levels; the value fluctuated only as share prices subsequently rose or fell.

Now, the number of shares or options a CEO ultimately receives is increasingly determined by meeting or missing a variety of targets, based on anything from stock-price gains and earnings-per-share thresholds to revenue, safety records and more. Better performance yields a bigger award. Poor performance can mean none at all.

For two-thirds of S&P 500 companies, the overall pay CEOs received over the past three years proved higher than initial targets, according to an ISS analysis. That is typically because performance triggers raised the number of shares CEOs received, or stock gains lifted the value of the original grant. On average, compensation was 16% higher than the target.

The values companies disclose for CEO equity awards also show that about one-third of CEOs start the fiscal year expecting to beat the performance targets that determine the size of those stock grants, ISS said.

In some cases "the company is setting goals they think the CEO is going to clear," said John Roe, head of analytics at ISS. "It's a tip-off to investors."

In March, General Electric Co. modified its bonus program for top executives to tie pay more closely to specific performance goals, including the level of cost reductions over the next year. The company said the changes came out of discussions with activist investor Trian Fund Management, which had called for more stringent targets.

In comments to investors last week, CEO Jeff Immelt said the company's bonus and long-term incentive plan keep executives' interests aligned with those of shareholders. Last year, Mr. Immelt received 80% of his projected bonus because the company missed operating-profit targets. His total pay fell by one-third to $18 million.

Boards must juggle a range of factors in setting performance targets. Investors and proxy advisers have their preferred measures, and consultants recommend targets that are challenging but not impossible. They can evaluate how well they have chosen by considering the market's reaction, said Ira Kay, managing partner at consultancy Pay Governance. "If we beat it and our stock goes down, it was probably not such a hard goal," Mr. Kay said.

United Parcel Service Inc. missed several of its performance targets last year, including goals for three-year revenue growth and total shareholder return. As a result, CEO David Abney received 70% of his targeted incentive pay. But the shortfall was more than made up by two salary increases and a one-time grant of stock and options. He received $13.7 million in total pay, up 21% from a year earlier.

A UPS spokesman said Mr. Abney and other top executives received incentive pay in line with company performance, and the company is committed to maintaining competitive compensation while tying pay to performance.

Write to Theo Francis at and Joann S. Lublin at

(END) Dow Jones Newswires

June 02, 2017 02:47 ET (06:47 GMT)