Linking CEO Pay to Performance

Article excerpt

COMPENSATION

COMPENSATION for chief executives was up dramatically in 2004, but that doesn't mean the system is broken. In fact, says Mercer Human Resource Consulting in its annual survey, boards and their compensation committees are making clear progress in linking pay with a company's performance, not just its share price.

The Mercer study, which analyzed proxy statements of 350 of the largest U.S. publicly traded companies, found that total direct compensation (base salary, annual bonus and the grant value of stock options, restricted stock and other long-term incentives [LTI]) increased 17.1 percent in 2004 (see chart, right). That increase was less than the overall rise in the companies' net income, or a median of 23 percent.

The era of chief executives receiving large pay hikes even when their companies underperform seems to have ended. At the 75th pcrcentile measuring annual pay and performance, CEOs whose companies' net income increased 76.5 percent saw their bonuses increase 76 percent. …