Nashville Business Journal: Over/under - CEO pay versus performance

Nashville Business Journal: Over/under – CEO pay versus performance

July 18 2014

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Excerpt:

Health care’s dominance of the list is not surprising, given its status as Nashville’s largest industry and the size of the companies involved.

“HCA is a pretty large company so it wouldn’t be surprising to hear that they’re one of the highest payers,” said Joseph Sorrentino, managing director of executive compensation firm Steven Hall and Partners.

While Nashville’s public company CEOs were split fairly evenly when it comes to pay increases versus decreases, only three area CEOs saw their base pay cut. Even among those who saw a total compensation drop, most reported at least a slight increase in base salary year-to-year.

Sorrentino, of Steven Hall and Partners, said that’s because of an increased focus on connecting compensation to company performance.

“In general, salary increases are relatively small for CEOs at this stage,” he said. “All the real growth in compensation is coming from either the bonus or the equity awards, which should be a function of how the company’s performing.”

Companies are using a variety of metrics, such as earnings per share, return on equity and total shareholder return (translation: change in stock price) to evaluate CEO performance and tweak CEO pay, Sorrentino said. Stock and option awards are commonly used to pay for performance because, in theory, a company’s stock should rise or fall based on the effectiveness of the CEO.

The shift to performance-based models is partly a consequence of “say on pay,” a provision of the federal Dodd-Frank Act now in its third year. Under Dodd-Frank, shareholders take an annual nonbinding vote on CEO compensation (see sidebar at left). While most compensation plans are approved with the majority of shareholders voting in favor, Sorrentino said, boards are now structuring compensation plans in order to increase their odds of winning “say on pay” votes by a substantial margin.

“What it has done in some respect is create more of a homogenized type of compensation program, where they look more similar than they have in the past,” Sorrentino said.

Overall, current shifts in executive pay trends are all aiming at a world where shareholders and management align, he said, and CEOs are truly judged based upon company success.

“Everyone’s trying to make sure,” he said, “that their pay reflects actual performance.”

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