Middle Market CEOs and CFOs See Big Jump in Bonuses and Annual Incentives

BDO analysis identifies metrics in long-term incentives plans that tightly align with growth

CHICAGO--(BUSINESS WIRE)--CEOs and CFOs of middle market companies largely experienced moderate pay increases in 2018, according to The BDO 600: 2019 Study of CEO and CFO Compensation Practices of 600 Mid-Market Public Companies. In aggregate, total direct compensation increased 3.6% for CEOs and 3.7% for CFOs, largely driven by bonuses and annual incentives.


CEO

Average Salary

Bonus & Annual
Incentives

Stock & Long-Term
Incentives

Total Direct
Compensation

Fiscal Year 2018

$710,233

$895,373

$2,472,265

$4,077,871

Fiscal Year 2017

$693,217

$822,804

$2,422,027

$3,938,048

% Change

2.5%

8.8%

2.1%

3.6%

CFO

Average Salary

Bonus & Annual
Incentives

Stock & Long-Term
Incentives

Total Direct
Compensation

Fiscal Year 2018

$411,467

 

$337,966

 

$842,095

 

$1,591,528

Fiscal Year 2017

$400,381

 

$312,372

 

$822,649

 

$1,535,402

% Change

2.8%

 

8.2%

 

2.4%

 

3.7%

Do Incentive Plans Influence Company Performance?

The BDO analysis identified a relationship between CEO compensation plans that put a greater percentage of pay “at risk” (e.g., annual and long-term incentives) and improvements in a company’s financial performance.

“A well-designed compensation plan should lead to better financial results, although critics point to the danger of being overly focused on the short-term,” said Tom Ziemba, a managing director in the Compensation Consulting practice at BDO. “It’s about finding the right balance. Executive pay plans need to include the right mix of metrics and targets to incentivize long-term financial growth and nonfinancial success.”

Selecting the Right Financial Metrics to Drive Growth

The report identified the financial metrics that serve as the best predictors of three-year total shareholder return (TSR) performance, which vary by industry. BDO then compared these results against the percentage of companies that used the metric(s) in their long-term incentive (LTI) plans. The report provides an industry analysis highlighting where there is tight alignment between the two, and where a disconnect exists. For instance:

Industry*

Best Predictors of 3-Year
TSR

Most Commonly Used
Metrics in LTI Plans

Gap Analysis

Retail

Earnings Before Interest & Taxes (EBIT) and Return on Invested Capital (ROIC)

EBIT, EBITDA, and Earnings Per Share (EPS)

More emphasis on EBIT and ROIC, instead of EBITDA and EPS in LTI plans may help drive long-term TSR growth

Healthcare

EBIT and Net Income

TSR, EBITDA, and Revenue

Revenue and EBITDA are the two most commonly used metrics, but our analysis indicates that EBIT and Net Income growth are better indicators of TSR growth

*Other industries included in the report analysis: Technology, Manufacturing, Real Estate, Energy, Financial Services – Banking, and Financial Services – Nonbanking

Other Key Findings:

  • CEO Pay Ratio: In 2018, companies were required to report a CEO pay ratio for the first time. The CEO pay ratio shows the difference between the CEO’s compensation and that of the median employee. Among the 600 middle market companies analyzed, the average CEO pay ratio was 121x and the median was 58x. Most of the companies (75%) have a ratio that is less than 117x. The retail industry had the highest ratio, due in part to a large part-time workforce, which tends to skew the numbers.

    “Unfortunately, the CEO pay ratio doesn’t provide compensation committees or investors with actionable insights. Ultimately, what matters most is whether a company’s adopted compensation philosophy does an effective job with retention and linking pay to the company’s long-term strategic objectives,” said Rick Smith, Global Employer Services Managing Director at BDO. “The more meaningful question is whether the metrics built into incentives actually focus attention on the right goals and behaviors.”
  • Larger Companies Put More Pay At-Risk: Roughly 80% of CEO pay was tied to incentive compensation. Variable compensation increased in tandem with company size for both CEOs and CFOs. The majority of long-term incentive plans favor full-value stock over stock options.

For more in-depth data and insights from The BDO 600: 2019 Study of CEO and CFO Compensation Practices of 600 Mid-Market Public Companies, click here.

*Material discussed is meant to provide general information and should not be acted on without professional advice tailored to your firm’s individual needs.

About the BDO 600: 2019 Study of CEO and CFO Compensation Practices of 600 Mid-Market Public Companies

The BDO 600: 2019 Study of CEO and CFO Compensation Practices of 600 Mid-Market Public Companies examined the compensation practices of publicly traded companies in the energy, financial services – banking, financial services – nonbanking, healthcare, manufacturing, real estate, retail, and technology industries. Companies in the six non-financial service industries in our study have annual revenues between $100 million and $3 billion. Companies in the two financial services industries in our study have assets between $100 million and $6 billion. Data sources include data provided by Salary.com and public company data collected from proxies and other sources.

About BDO’s Global Employer Services Practice

BDO’s Global Employer Services practice consists of an experienced and dedicated team of professionals who are committed to assisting leadership and boards with developing strategies and compensation programs designed to attract, retain, and reward the executive team. Our services include designing and benchmarking executive compensation programs including cash- and equity-based programs, board remuneration, board and executive talent reviews, compensation committee development, non-qualified and deferred compensation plans, advising on tax and accounting issues, and other related services.

Our services are tailored and scalable, designed to accommodate the unique needs of public, private, and nonprofit clients of all sizes and across all industries including multinational Fortune 500 companies.

About BDO USA

BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, and advisory services to a wide range of publicly traded and privately held companies. For more than 100 years, BDO has provided quality service through the active involvement of experienced and committed professionals. The firm serves clients through more than 60 offices and over 700 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multi-national clients through a global network of more than 80,000 people working out of 1,600 offices across 162 countries.

BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. For more information please visit: www.bdo.com.


Contacts

Madeline O’Connor
Bliss Integrated Communication
(646) 576-4113
madeline@blissintegrated.com