Among the performance measures commonly used by companies to guide performance-based pay are compounded annual growth rate (CAGR), total shareholder return (TSR), return on equity, and earnings per share (EPS). These benchmarks have followed an upward trajectory in recent years among both life insurers and other financial services firms—and among companies in other industries.
The “2013 CEO Compensation Report,” published by Equilar, pegs the CAGR for the financial services industry at 4.3 percent during the 2010-2012 period. The EPS and TSR percentage changes over the same time frame were +31.6 percent and +11 percent, respectively.
However, the report notes, the three-year median realizable pay among all financial services CEOs was actually below that of target pay: $22.3 million versus $24.6 million, respectively. This contrasts with other sectors, most notably the technology space, which enjoyed the largest increase of realizable pay ($24.8 million) relative to target pay ($23 million), a difference of 23.8 percent.
For the 2010 to 2012 period, equity awards included in realizable pay for all S&P 500 CEOs consisted of 43 percent performance equity, 29 percent stock options, and 28 percent time-vested stock. Equity awards for target pay consisted of 35 percent performance equity, 38 percent options, and 27 percent time-vested stock.
The report observes that a large amount (43 percent) of equity realizable by CEOs is the result of performance awards earned in 2010 to 2012. This contrasts with target pay, for which performance equity is 35 percent of total equity awards.
“These figures indicate that performance equity may have generally been earned above target, or that the market value of these awards has generally increased from the date they were granted until the end of 2012,” the report states.
Given continuing uncertainty about the outlook for the U.S. and global economies, can one expect CEO pay to continue to rise? John Gayley, director of the North American Insurance Executive Compensation Practice at Towers Watson believes that future gains will be modest.
“Target pay numbers may go up slightly, mostly on the long-term incentive side,” he says. “Base salaries and annual incentive targets probably won’t change much.
“As to actual pay, let’s assume the market survives the current flux and continues a gradual rise, along with interest rates,” he adds. “I would assume this would improve the actual pay for CEOs, much as it would for other execs and employees.”