Executive Compensation: Pay for Performance Incentives Plans

by Malak Kazan, CECP, CCP, CBP, GRP 4. March 2011 14:44

As part of ERI's Executive Compensation Index and tracking the highest paid executives in 45 top publicly traded US firms, cash bonuses have shifted to cash incentives. From 2006 thru 2009, 71% of the companies paid no cash bonuses in at least three of the four years. While these firms did not pay cash bonuses as defined by the SEC, they did, however pay compensation as non-equity incentives. In the same 4-year period, 80% of the companies paid some amount in non-equity compensation which is the compensation component where performance based cash incentive plans are reported.

The prevalence of these trends may be attributed to aligning executive pay to performance but also to comply with IRC Sec 162 (m) that provides for tax deduction cap of first $1M of compensation, except, there is no cap for performance-based compensation. Compensation values reported as bonuses tend to be "discretionary" without any preset targets, hence do not qualify for this favorable tax treatment.

In 2006, the average bonus was $2.9 million (for the 45 companies in the index). In 2010, the sum of bonus and non-equity incentives also averaged $2.9 million. So the highest paid executive did not receive less variable cash compensation by not receiving bonuses, but the dollars were simply shifted to performance-based plans.

Let's take a look at how these trends has been reported within in recent filings within the Pharmaceutical Industry. The summary of Amgen Executive Compensation elements reported in their latest proxy filing is shown below (note, no reference to bonus plan). 

The first image defines each compensation component.  Annual cash incentive awards are determined by the compensation Committee generally using pre-established Company goals and results measure under the plan. 

 

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The next image details Amgen’s incentive plan design that focus on four areas:  financials, new product launches, product development, and international expansion.

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For Pharmaceutical Companies, often, we do not see bonuses reported. Becton Dickinson Summary Compensation Table reported in their latest proxy is shown below and excludes the bonus column altogether from the table.

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The goal of changes in SEC reporting is to make elements of executive compensation more transparent to the stakeholders. By requiring a differentiation between non-performance based bonuses and performance based non-equity incentives in the Summary Compensation Table, it is clear that some companies have shifted to pay-for-performance plans and achieve more favorable tax treatment.