Current Trends & Future Insights of Executive Compensation

Zayla recently had the opportunity to provide a “State of the State” briefing to members of WorldatWork on all things executive compensation.  The presentation spanned both current trends and future considerations – we thought we’d share some key takeaways for your benefit:

Compensation Philosophy

• There is empirical data that concludes that articulate a compensation philosophy can weather market volatility and outperform peers.
• Higher performing companies are associated with compensation philosophies that position variable pay above market 50^th percentile.

Reported CEO Pay Trends

• CEO pay opportunities have increased in the last five years on average from 5.5% – 6.9%. The majority of increases have come in the form of long-term incentive award.

Short-Term Incentives (“STI”)

• STI metric use for publicly traded companies has been relatively the same since 2021, except for the increased use of ESG.
• Privately held companies rely more heavily on EBITDA and individual executive performance related metrics in their STI program designs.

Long-Term Incentives

• Relative total shareholder return and restricted stock continue to dominate public company executive long-term incentive award use as companies look to combat the volatile market, tight labor market and pressure on share usage.
• The relationship between threshold, target and maximum performance metric hurdles has been slowly spreading (~1%/year) over the last 4 years as companies tailor designs against increasing market volatility.
• The war for talent rages on – as evidenced by the the near doubling in LTI award prevalence over the past 15 years at privately held, not-for-profit and government entities as they look to compete with publicly traded companies for talent.

Pay-Ratio

• CEO to Median Employee Pay actually matters. “Best Performing Companies” pay their CEOs an average 210x more than the average employee overall compared to 591x at the “Worst Performing Companies.”

Say on Pay

• Institutional investors were more supportive of SOP in 2024 compared to the last couple of years, with an average approval rating of x%
• For next proxy season, make sure you are engaging with shareholders effectively and crafting clear disclosures that highlight business rationale for pay decisions.

ESG

• Data suggests better performing companies (from a shareholder value perspective) are including ESG goals in their STI or LTI programs.

Non-Competes

• Keep an eye on the current legal landscape, as the FTC explores avenues for reinstating its landmark ban on non-compete agreements in the face of court challenges.

Future Considerations

1. 1. Consider adopting a compensation philosophy if you haven’t already.
   2. Evaluate your pay programs in a holistic manner to ensure best bang for the perceived buck.
   3. Don’t over-complicate short-term incentives. Broaden performance shoulders for slower periods.
   4. Long-term incentives should have a good balance of retention and performance. If share usage becomes an issue, consider leaning into full value awards.
   5. Closely watch FTC appeals in the non-compete space.
   6. Consider how AI and new approaches to data analytics can sharpen your compensation inputs and refine philosophies. Also consider how AI can sharpen governance analysis and aid in investor outreach.

View the webinar or contact us for further insights and details.