Utility Incentive Compensation Study

Utility Incentive Compensation Study

April 16 2013

Powering Incentive Compensation
How Utilities Pay for Performance

PDF of StudySteven Hall & Partners recently completed a study of incentive compensation programs at 73 of the largest utility companies (revenues greater than $500 million) in the United States utilizing data from 2012 proxy statements.  We found that utility companies are unique from their non-utility counterparts in the way they pay their top executives.

In part due to the predictability of the business, we find the way they pay their top executives is less variable, with a higher percentage of total compensation being paid in the form of base salary than we see in other industries.  We also found the focus on performance for utility companies is broader than among many other public companies.  In addition to earnings and shareholder returns, utilities must also consider non-financial performance metrics such as safety and customer service, which we found to be prevalent among the companies studied. Additionally, our study found that:

Fixed vs. Variable Compensation

  • Target CEO compensation is 26% fixed (i.e. base salary) and 74% variable
    • Target compensation for other named executive officers (“NEOs”) is 38% fixed and 62% variable
  • Companies with larger revenues pay more long-term incentive compensation and companies with smaller revenues pay more fixed compensation as a percentage of total compensation

Short-Term Incentives

  • Median annual incentive targets for CEOs equaled 100% of base salary
    • Median target range for other NEOs is 50% to 70% of base salary
  • 97% of the companies studied used at least one earnings metric
    • 69% of these companies disclosed they weighted earnings 50% or greater for CEO short-term performance

Long-Term Incentives

  • 93% of companies granted performance-based awards to the CEO
    • Performance-based awards comprised the largest portion of long term compensation for both the CEO and other NEOs
    • A majority of CEO long-term performance awards are based on total shareholder return (TSR) performance relative to a comparator group
  • 56% of companies granted time-vested restricted stock to the CEO
  • 25% of companies granted option awards to the CEO

PDF: Powering Incentive Compensation