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Article | Executive Pay Memo North America

Year-end executive compensation webcast polls hint at what to expect in 2019

Executive Compensation
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By Steve Kline , Steve Seelig and Loren Lehnen | December 18, 2018

On December 6, 2018 Willis Towers Watson hosted its annual year-end executive compensation webcast which looked at issues that could shape year-end and 2019 executive pay planning decisions. We also polled the webcast participants on several key issues.

On December 6, 2018 Willis Towers Watson hosted its annual year-end executive compensation webcast (log in or register to access replay). Our panel of subject matter experts addressed a range of issues that companies will need to navigate when making year-end and 2019 planning decisions about their executive pay programs. During the discussion we also polled the webcast participants (111 on average) about several key issues, as summarized below.

2018 performance impacts incentive payouts

Over the course of 2018, our blogs have monitored and reported the high expectations for financial results in 2018 and the strong performance year-to-date. Earnings growth is up compared to 2017 in most sectors of the economy. As such there’s a real chance annual incentive payouts will trend above 2017 levels, which showed a median payout of 115% of target among CEOs of the S&P 1500. For more details, see “Pay-for-performance update for the S&P 1500: 2017 incentive plan results,” Executive Pay Matters, July 2, 2018. When polled about expected payouts under 2018 annual incentives, the webcast attendees indicated they expected incentives to trend at or above target, as summarized in Figure 1.

Figure 1. What level of annual bonuses do you expect your senior executives to earn?
Prevalence Expected incentive payouts?
34% Around target (90% to 110% of target)
32% Above target (110% to 150% of target)
21% Approaching target (50% to 90% of target)
7% Little to no payout (less than 50% of target)
6% Approaching max payout (more than 150% of target)

Compensation committee interests

The role of the compensation committee is evolving to encompass greater oversight on broader human resource issues. This change is driven by factors that include:

  • Investor interest in broader environmental, social and governance (ESG) issues (which includes human capital management)
  • The need to create and maintain a positive brand reputation among customers and employees
  • Scrutiny brought by regulatory changes (e.g., U.K. gender pay reporting)
  • An increasingly acute sense of the importance of human capital to mitigate potential risks and create long-term sustainable value

Webcast attendees cited disperse current or future areas of focus for their compensation committees as summarized by poll results in Figure 2. The results reflect committees’ greater interest in these areas, particularly gender pay (Do we have any pay gaps between female and male employees and/or any biases within our compensation programs?) and inclusion and diversity (Can a more diverse workforce improve business performance, and do we have the right mix of employees in support of our future direction and in alignment with our customers?). 

Figure 2. Which of the emerging areas has the compensation committee focused on or plans to focus on?
Prevalence Areas of focus
61% Gender or fair pay
59% Inclusion and diversity
47% Culture and risk
25% Clawbacks

Multiple areas of focus were permitted

Year 2 median employee selection

For the second year of disclosure of the CEO pay ratio, companies will need to determine if they must use the same median employee as in Year 1 unless there is a change in employee population or employee compensation arrangements, or a change in the median employee’s circumstance (including termination).  When polled about whether they planned to use the Year 1 employee in Year 2, many said “yes,” but a large number of companies weren’t sure yet, as shown in Figure 3. For more related perspective, see “Reasons to consider expanded Year 2 CEO pay ratio disclosures,” Executive Pay Matters, December 11, 2018.

Figure 3. Do you plan to use the same median employee to determine the CEO pay ratio next year?
Prevalence Same median employee?
49% Yes
40% Not sure yet
11% No

ESG and incentive plans

In 2017 fewer than 10% of companies disclosed the use of ESG metrics in their incentive plans. Generally, these were companies operating in specific industries such as the materials and utility sectors where environmental issues are front and center. When polled, webcast attendees indicated ESG metrics are getting more attention, with several approaches emerging for their use as incentive metrics, as shown in Figure 4.

Figure 4. Has the committee implemented or are they considering implementing ESG metrics within compensation plans?
Prevalence Areas of focus
78% No
9% Yes, as an organizational metric
9% Yes, as an individual performance metric
4% Yes, as an organization payout modifier

While we don’t anticipate a ground swell in 2019, we do expect to see a gradual increase in the use of ESG metrics in executive incentive plans over the coming years as organizations come under increasing pressure to demonstrate their ESG priorities, and leverage these commitments to drive shareholder value.

What can we expect?

Looking ahead, expectations for economic and financial performance remain robust, though some headwinds exist and surprises are sure to come, as recent stock market volatility suggests. Meanwhile investors, proxy advisors and compensation committees are increasingly concerned about talent, diversity, pay fairness and ESG issues. Clearly 2019 will be an exciting year in the executive compensation space.

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