Executive Compensation and Company Revenue Growth Not As Strong
REDMOND, WA - February 27, 2012 - Total compensation for the highest paid executives was up just 2.1% from this time last year (Table 1).
This growth rate is much lower than we have seen over the past year, despite constant growth in company revenues over the same period.
ERI tracks executive compensation in a specifically selected sample of publicly-traded companies from an array of industries to identify current trends.
Highlights from the analyses include the following:
From February 2011 to February 2012, Total Overall Compensation for the highest paid executive increased 2.1% to $17.5 million per year
Base salary increased 10.5%
Company Revenues rose 8.8%
Table 1. Compensation Components Year-Over-Year
Executive compensation typically consists of several components: a fixed base salary, a variable bonus in cash and/or non-equity incentives based on meeting performance goals, and a variable equity payment in stock (either restricted stock awards or stock options) based on stock prices.
Pension and other compensation components are added to the compensation package for these top executives.
Figure 1 shows that from early 2010 to early 2011, the year-over-year increase in total executive compensation went from -10% to +25%.
This sharp increase occurred about a quarter before companies reported a similar turnaround in revenues.
However, Figure 1 also shows that the increases in company revenues plateaued at around +10%, while the trend in compensation continued to climb.
It was after two quarters of the start of this plateau that the sharp decline in the rate of change in compensation started.
While executive compensation is obviously related to company revenues, based on historical trends, there appear to be some potential future scenarios suggested by the data. The reversal in the growth rate of compensation may suggest that the rebound of company revenue was not as strong as anticipated.
If the change in compensation reaches negative territory, it would also suggest that declining growth in company revenues may not be far behind.
Figure 2 shows that since 2007, the composition of executive compensation has changed very little, though this graph does show significant changes in the Sarbanes-Oxley era.
Compensation Component Proportions
The Apple Effect
There is a rather large footnote to these analyses — the removal of the top compensation at Apple (CIK: 0000320193) from the analysis.
On August 24, 2011, Steve Jobs resigned as CEO and Timothy Cook was named the company's CEO.
The 2011 proxy for Apple reports that for FY2011, Mr. Cook received $376,180,000 in stock awards.
During FY 2011, Apple also reported a 68% increase in revenue over the prior year.
Both of these figures are significantly out of line with the rest of the index, and are therefore being reported separately.
Figure 3 demonstrates how including these data changes the composition of the overall executive compensation package as compared to Figure 2.
If this event is representative of future trends in executive compensation, if stock awards do represent 60% of the top executive compensation package, then we have come full circle to the late 1990s where options awards accounted for 60% of compensation.
However, it is much more likely that the events at Apple were atypical.
Compensation Component Proportions including Apple
About ERI Economic Research Institute:
ERI Economic Research Institute, Inc., is a leader in compensation and job content information. With data gathered from online surveys and an extensive survey library, ERI's staff of researchers provides subscribers with assessments of salaries, relocation costs, cost-of-living comparisons, and executive compensation. ERI's compensation databases contain over 20 years of collected data, covering the United States, Canada, the United Kingdom, and other countries throughout Europe. ERI subscribers include the majority of the Fortune 500 and thousands of other small and medium sized companies. ERI's products include the Salary Assessor®, Geographic Assessor®, Relocation Assessor®, Executive Compensation Assessor®, and Nonprofit Comparables Assessor™ software and Occupational Assessor®, eDOT®. For more information about ERI and its products, visit www.erieri.com.