Tag: Executive Compensation

Top 10 Highest-Paid Nonprofit CEOs in California

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Nonprofit organizations are private, non-governmental entities, typically created to benefit the public or community and further or fulfill a specific mission statement. This makes executive compensation at nonprofits an interesting – albeit at times, contentious – topic. Because nonprofits operate under regulatory guidelines distinct from for-profit entities, CEO compensation at nonprofit organizations is usually influenced by a combination of responsibilities: adhering to the mission, responsible spending, and compliance requirements.

Factors That Influence Executive Compensation at Nonprofits

As mentioned, nonprofits operate under a distinct set of principles as opposed to other entities. These principles ultimately impact the decision making behind CEO compensation.  As expected, CEO compensation at nonprofits is complex and dependent on myriad factors, such as the size and scale of the organization, budget requirements, government regulations specific to tax-exempt entities, and arguably most important, a board of directors.

In short, the board of directors plays a pivotal role in ensuring that CEO compensation aligns fairly with a nonprofit’s mission and overall legal standards. Because nonprofits are typically funded from an array of sources, such as donations from individuals and organizational fundraising, in addition to applying for funding from government entities and other sources, pay transparency, especially at the executive level, is critical. This is where the board of directors, usually compiled of individuals that hold no personal or financial interest in the organization, becomes key in decision making as it pertains to CEO compensation.

Compensating CEOs at Nonprofits

Despite misconceptions about executive compensation at nonprofits, it is important that the board of directors determine a reasonable and competitive salary that is proportional to the organizational size and competitive in its sector. A competitive CEO salary is vital to ensuring that a nonprofit can achieve the following goals:

  • Attract and retain top talent
  • Motivate CEOs as they navigate complex issues with experience and expertise
  • Maintain its mission statement through decisive and impactful executive direction

CEOs are principal figures at nonprofit organizations, which makes fair and competitive executive compensation critical.

Highest-Paid Nonprofit CEOs in California

Nonprofit organizations continue to play a necessary role in furthering social causes, as well as member and professional development, and can have missions related to the arts and humanities, education, the environment, health and human services, international affairs, religion, and more. As specific organizations continue to gain traction and flourish, the social optics of ethical executive compensation become all the more relevant. With that said, the chart below highlights the top 10 highest–paid CEOs at nonprofits in the state of California using data reported in 2023.  

CompanyNameTitleTotal Compensation
Kaiser Foundation Health Plan Inc. Gregory Adams Chairman & CEO $12,567,386
Sutter Health Warner Thomas President & CEO $8,705,274
Delta Dental of California Michael J CastroCEO $6,909,365
Credit Unions in the State of California Gary Rodrigues President & CEO $6,705,661
Motion Picture Association Inc.Charles RivkinChairman & CEO$4,284,073
Sutter HealthSarah KrevansEmeritus CEO$4,097,431
Educational Employees Credit UnionElizabeth DooleyCEO$3,304,415
Adventist Health System-WestKerry HeinrichDirector & CEO$3,302,428
Scan Health PlanSachin H. Jain, MDPresident & CEO$3,268,166
San Diego County Credit UnionTeresa CampbellCEO & President$3,100,634

It is important to remember that figures for nonprofit executive director salaries in California may change over time, reflecting market dynamics, company performance, and industry trends. Stay informed of the latest compensation survey data, powered by ERI, to ensure that your salary plan remains up to date and competitive within your industry.   

For a more detailed breakdown of executive compensation in the nonprofit sector, turn to ERI’s Nonprofit Comparables Assessor today and take advantage of these features:  

  • Review compensation data collected from nonprofit organizations’ IRS Forms 990, 990-EZ, and 990-PF in easy-to-interpret interactive graphs and tables. 
  • Generate benchmark reports based on salary data from comparable peers in tax-exempt and/or for-profit organizations.  
  • Group peer organizations, including for-profit data, with the detailed compensation comparables needed for a “rebuttable presumption of reasonableness” that protects an exempt organization from the imposition of intermediate sanctions taxes, penalties, and interest by the IRS (IRC 4958). 
  • Search, rank, and sort compensation data from comparable organizations by industry subsector, geographic area, date, and size (revenue or assets). 

ERI’s Assessor Platform is designed to help you customize your executive compensation analysis to confidently grasp how executive salaries compare in your specific industry and make the most accurate data-driven decisions.  

Enjoyed this article? Learn more about top executive compensation in various industries at ERI, including the top 20 highest-paid CEOs in health care and the top 20 highest-paid CEOs in technology.    

Top 20 Highest-Paid CEOs in Technology

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Leaders of the technology industry have a discerning eye for inventiveness and are often admired for piloting the industry towards innovation and ingenuity. Technology leaders are known for their insightful vision, planting the seeds for advancements to take root and thrive in a highly competitive industry. In an ever-evolving industry like technology, HR professionals must rely on current market data to accurately benchmark salaries that attract and retain top talent.

Even in the face of constant transformation, effective tech executives can steer companies towards success. This is what makes them so invaluable and some of the highest-paid executives of any industry—their clever intuition for enterprise is one of the very factors that influence their compensation packages, which are already quite complex.

To understand executive compensation packages for tech CEOs, we must first explore which factors contribute to executive pay and the reasoning behind them. This helps HR and compensation analysts make the most accurate decisions in salary planning.

Technology CEO Total Compensation Factors

CEO compensation in the technology industry is dependent on multiple factors. Beyond their base salary, a tech industry CEO’s total rewards package is typically largely comprised of additional pay components, such as stock awards, additional benefits, and performance-based incentives. Executive compensation is often tied to company performance because of the competitive and fast-paced nature of the technology industry. More than anything, technology is an industry that hinges on risks and investments, which makes clear executive leadership crucial for final decision-making processes.

Highest-Paid Technology CEOs

The technology sector continues to dominate executive compensation, with its top CEOs earning multimillion dollar salaries supplemented by stock awards, bonuses, and other incentives. As tech companies expand their global influence, executive pay packages reflect the intense competition for leadership talent capable of driving shareholder value and encouraging product innovation. The chart below highlights the highest-paid CEOS in the technology industry based on data collected in 2024, in order of highest total compensation, highlighting how base salary factors into the total.

NameCompanySalaryTotal
Satya NadellaMicrosoft Corp$ 2,500,000.00$ 79,106,183.00
Timothy CookApple Inc$ 3,000,000.00$ 74,609,802.00
Matthew MurphyMarvell Technology Group Ltd$ 1,138,698.00$ 45,163,040.00
Marc BenioffSalesforce.com Inc$ 1,550,000.00$ 39,642,173.00
Shantanu NarayenAdobe Inc$ 1,500,000.00$ 52,390,182.00
Charles RobbinsCisco Systems Inc$ 1,390,000.00$ 39,202,654.00
Sasan GoodarziIntuit Inc$ 1,200,000.00$ 36,572,360.00
Timothy ArcherLam Research Corp$ 1,176,923.00$ 30,135,041.00
Sanjay MehrotraMicron Technology Inc$ 1,416,909.00$ 30,060,126.00
Vincent MatteraII-VI Inc$ 1,060,096.00$ 28,811,152.00
Julie SweetAccenture PLC$ 1,550,000.00$ 24,915,146.00
Richard WallaceKLA Corp$ 1,129,905.00$ 22,832,965.00
Vincent RocheAnalog Devices Inc$ 1,137,692.00$ 22,436,615.00
Thierry DelaporteWipro Ltd$ 3,900,827.00$ 20,111,105.00
Michael SalvinoDXC Technology Co$ 1,350,000.00$ 19,821,384.00
David GoeckelerWestern Digital Corp$ 1,245,192.00$ 17,690,772.00
George SchindlerCGI Inc$ 1,921,418.00$ 14,162,558.00
Serge GodinCGI Inc$ 1,301,000.00$ 13,710,280.00
Nazzic KeeneScience Applications International Corp$ 1,258,224.00$ 12,895,917.00
Philip GallagherAvnet Inc$ 1,200,000.00$ 8,775,978.00

This table presents the top 20 highest–paid CEOs based on total reported compensation. While stock awards and performance–based variable compensation form a significant portion of executive pay, base salaries are a fraction of total earnings.

Be mindful that compensation figures may change over time, reflecting market dynamics, company performance, and industry trends. Stay informed of the latest compensation survey data to ensure your salary plan remains up to date and competitive within your industry.

For a more detailed breakdown of executive compensation in technology or other industries, turn to ERI’s Executive Compensation Assessor, which provides a complete analysis of compensation factors at the executive level, including salaries, bonuses, long-term incentives, non-equity incentives, stock awards, option awards, pension, other compensation, and more. ERI’s Assessor Platform is designed to help you customize your executive compensation analysis to confidently grasp how executive salaries compare in your specific industry and make the most accurate data-driven decisions.

Enjoyed this article? Learn more about top executive compensation in various industries at ERI, including the top 20 highest-paid CEOs in health care.

Top 20 Highest-Paid CEOs in Health Care

Posted on | by ERI

The health care sector is comprised of multiple sub-industries and diverse professions that work in tandem to provide for and service health needs and concerns. As the health care sector develops and tackles emerging and challenging issues – such as talent shortages, shift differential analysis, and regulatory compliance complexities – it is important for HR professionals to accurately benchmark salaries, particularly at the top executive level, based on current market data and industry trends.  

Despite growing challenges, ERI’s 2025 Salary Increase Survey projects the budget for executive compensation in health care to increase by 3.9 % this year, indicating that salaries for CEOs in health care should remain steady. CEO pay in health care is a complex topic, and the best way to approach it is by first understanding the myriad factors that contribute to executive compensation in this unique industry.  

CEO Compensation in Health Care 

The increase in CEO compensation reflects the complexity of managing and navigating care in an increasingly unpredictable climate, particularly given the impacts of the COVID-19 pandemic, high inflation, government policies, etc. This makes the demand for talented executive leaders critical, as their duties span not only quality and managed care, but also legal services and compliance.  

In general, total compensation packages are dependent on a range of factors, such as the specific sub-industry, geographic location, organization size, and competitiveness. Moreover, salaries are significantly influenced by individual factors, including a professional’s level of education, specialization, experience, and relevant skills and certifications. However, at the executive level, geographic location may not necessarily be a crucial factor in benchmarking executive salaries because these roles are often recruited at the national level from candidates with experience in the industry. In the end, multiple elements determine an executive’s overall compensation package.  

Top 20 Highest-Paid CEOs in Health Care 

Below is a list of the top 20 CEOs in health care based on the most recent complete form year (2024). For this list, base salary serves as the rank-order metric as it is predetermined and the most fixed among the various forms of executive compensation.

First NameLast NameTitleCompanySalaryTotal Compensation
WilliamSiboldDirector, President and Chief Executive OfficerMadrigal Pharmaceuticals Inc$275,400.00$32,268,400.00
AriBousbibChairman of the Board and Chief Executive OfficerIQVIA Holdings Inc$1,800,000.00$29,151,752.00
JosephHoganPresident, Chief Executive Officer and DirectorAlign Technology Inc$1,354,769.00$28,952,411.00
JoaquinDuatoChairman of the Board and Chief Executive OfficerJohnson & Johnson$1,584,615.00$28,397,240.00
DavidRicksChairman of the Board, President and Chief Executive OfficerEli Lilly and Co$1,621,154.00$26,565,732.00
JasonHollarChief Executive Officer and DirectorCardinal Health Inc$1,434,153.00$25,650,709.00
RamiElghandourPresident, Chief Executive Officer and Chairman of the BoardArcellx Inc$600,960.00$24,964,306.00
AlbertBourlaChairman of the Board and Chief Executive OfficerPfizer Inc$1,800,000.00$24,648,727.00
SamuelHazenDirector and Chief Executive OfficerHCA Healthcare Inc$1,539,947.00$23,799,137.00
AndrewWittyDirector and Chief Executive OfficerUnitedHealth Group Inc$1,500,000.00$23,534,936.00
RobertFordChairman of the Board and Chief Executive OfficerAbbott Laboratories$1,500,000.00$23,268,171.00
DavidCordaniChairman of the Board, President and Chief Executive OfficerThe Cigna Group$1,573,077.00$23,251,096.00
RobertBradwayChairman of the Board, President and Chief Executive OfficerAmgen Inc$1,786,977.00$22,643,650.00
DanielO'DayChairman of the Board and Chief Executive OfficerGilead Sciences Inc$1,740,962.00$22,607,690.00
GailBoudreauxPresident, Chief Executive Officer and DirectorAnthem Inc$1,600,000.00$21,889,039.00
KarenLynchDirector, President and Chief Executive OfficerCVS Health Corp$1,500,000.00$21,615,034.00
MichaelMahoneyChairman of the Board, President and Chief Executive OfficerBoston Scientific Corp$1,400,000.00$21,420,801.00
RainerBlairDirector, President and Chief Executive OfficerDanaher Corp$1,300,000.00$20,903,282.00
KevinLoboChairman of the Board, Chief Executive Officer and PresidentStryker Corp$1,391,667.00$20,767,847.00
ReshmaKewalramaniDirector, President and Chief Executive OfficerVertex Pharmaceuticals Inc$1,500,000.00$20,594,441.00

Be mindful that compensation figures may change over time, reflecting market dynamics, company performance, and industry trends. Stay informed of the latest compensation survey data to ensure your salary plan remains up to date and competitive within your industry.  

For a more detailed breakdown of executive compensation in health care or other industries, turn to ERI’s Executive Compensation Assessor, which provides a complete analysis of compensation factors at the executive level, including salaries, bonuses, long-term incentives, non-equity incentives, stock awards, option awards, pension, other compensation, and more. Those interested specifically in nonprofit executive compensation should consider ERI’s Nonprofit Comparables Assessor, which allows you to generate benchmark reports based on salary data from comparable peers in tax-exempt and/or for-profit organizations. ERI’s Assessor Platform is designed to help you customize your executive compensation analysis to confidently grasp how executive salaries compare in your specific industry and make the most accurate data-driven decisions. 

Enjoyed this article? Learn more about top 10 executive compensation in various industries at ERI, including the top 10 highest-paid CEOs at nonprofits 2024 and the top top 10 highest-paid CEOs in the construction industry.   

“Control of Pay” vs. “Say on Pay” for British Executives

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Aligning executive pay to performance seems to be at the forefront for boards, shareholders, and legislators. The UK has been ahead of the curve when it comes to regulating executive compensation practices. As early as 1999, they were considering a non-binding Say-On-Pay vote for executive compensation. However, it didn’t become enacted until 2002 when the Directors’ Remuneration Report was introduced, which required companies to submit a remuneration report to a non-binding shareholder vote at each annual general meeting.  Subsequently, UK made amendments to regulate executive contract renewals as well as loss of office (i.e. golden parachute, severances, etc.), and other countries, like the Netherlands and Australia, introduced similar legislation.

Recently, on June 20, 2012, there was an unprecedented proposed legislation in the UK to give the shareholders a “binding” vote for the CEO compensation recommendation.  The main provisions of the proposal follow:

  • Publicly listed companies will need to gain approval of shareholders to award compensation packages to directors in an annual vote, which may be effective as early as 2013.
  • The vote can be limited to once every three years as long as no changes are made to the compensation arrangements.
  • A binding vote will cover the level of exit payments (severances).
  • To improve transparency, companies will be required to disclose a single remuneration figure with a chart comparing the pay recommendation and company performance for each executive.

Let’s take a look at some of the recent events that may have triggered this proposal:

  • Public sentiment regarding the misalignment of the pay recommendation with share performance and pay practices (i.e. freezing or reducing pay of employees while increasing executive pay).
  • The slow economic turnaround in most countries coupled with lack of investor confidence in the markets.
  • Shareholders (especially insurers and large pension funds) are more actively participating in the Say-on-Pay process reviewing the executive pay recommendation.
  • Continued pay for failure practices resulting in excessive exit packages awarded to executives.
  • Highly publicized “No” votes at WPP, Aviva Astra Zeneca, and Trinity Mirror.
  • Shareholder advisory groups, like Institutional Shareholder Services, continue to raise concerns about remuneration practices.

Depending on the outcome of this proposal, other countries may follow suit in proposing similar changes.

For more UK executive compensation data, visit www.erieri.com.

Executive Compensation and Stock Warrant Plans

Executive Compensation and Stock Warrant Plans

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When Rob Johnson took the helm as CEO of JC Penney, his executive compensation package made headlines because he invested his own money in the company by purchasing a warrant valued at almost $50 million.  Warrants are financial instruments that are typically “wrapped” into debt arrangements like bonds, sold to investors to raise cash, and function similar to options.  So, how are warrants structured to be used as a compensation instrument?

CEO Johnson’s warrant has the following characteristics:

  • a 7.5 year term
  • vest date after June 13, 2017
  • entitles him to acquire 7,256,894 shares
  • exercise price of $29.92 per share
  • vests only when market price is greater than $36.81

During ERI’s Q1 2012 data collection efforts for European executive compensation data, we identified a few Danish companies that have “broad-based” stock warrant plans in which both executive and non-executive employees are eligible. One such company is Lundbeck Group.  Their plan allows warrants to be issued up to a nominal value of DKK 8,750,000, equivalent to 1,750,000 shares of DKK 5 each. The awards have a 5-year vesting schedule that hybrid cliff and graded: no vesting in years one and two; 20% in three years; 30% in the fourth year; 50% in the fifth year, and otherwise lapse if not exercised before December 31, 2018.

Some stock warrants are “performance-based” where the grantee has to achieve target goals in order to actually own the warrant.  For example, in order for a warrant of 5,000 shares to vest, the grantee must sell $1,000,000 of product in the next 12 months with a cap of 50,000 shares.

When a warrant is issued as a compensation instrument, how similar is it to employee stock options?  Let’s start with a side-by-side comparison to understand the similarities:

 Warrant  Employee Stock Options*
 Right to buy company shares at a future date and at a pre-agreed price  Same
 Do not have to be tied to employment (or board membership)  Same for non-qualified plan
 Can have a term longer than 10 years  Same for non-qualified plan
 Are dilutive and affect stock values  Same
 Underlying stock is equal to the exercise price, plus any increase in value  Same
 Disclosed in proxy statement  in option awards column  Same
 Not taxable upon grant or issue  Same
 Upon exercise difference between exercise price and the stock’s value is taxed at ordinary income tax rate  Same for non-qualified plan
 *Same = both qualified and non-qualified employee stock option plans unless otherwise  noted

So are warrants “synonymous” with non-qualified stock options?  Technically, the answer is “no.”  In addition to raising funds, companies also issue warrants to control dilution by issuing the warrants to a targeted group of shareholders who may elect to invest more money or lose ownership percentage. When warrants are issued to raise money or control dilution, they are transferable in the open market and do not have restrictions like not vesting or performance triggers.  As a compensation tool, warrants appear to be more versatile and can serve dual purposes, depending on the needs of the organization, whereas employee stock options have more specific requirements.

For more information, analytics, and tools related to executive compensation, visit www.erieri.com.

ERI in the News — Executive Compensation

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Check out Trade Show Executive’s recent article “What’s in Your Wallet?,” by Danica Tormohlen, Contributing Editor. Tormohlen contacted ERI for compensation research and insight while compiling a special report on compensation trends for trade show executives.

Visit ERI’s News Room for more press mentions, recent press releases, and quarterly newsletters, as well as contact information for media inquiries.

Payless Shoes Fits the ERI Executive Compensation Index

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ERI Economic Research Institute’s Executive Compensation Index for the first half of 2011 indicated that restricted stock awards increased 27.8%, and bonuses and non-equity incentives increased 32%, while base salaries and stock option awards were relatively constant for the year. These results aligned with the bearish market, conservative spending, and shareholder activism against excessive risk compensation practices that were prevalent for the time period covered, which continue to spill over to current conditions.

Reviewing recent proxy statements, we identified Collective Brands Inc., most popularly known for Payless store brand, as an excellent example that demonstrated these trends. Based on the below Summary Compensation Table, between 2008 and 2009, the company’s CEO, Matthew E. Rubel, received a 55.0% increase in non-equity incentives from $1,166,996 to $1,808,835. In 2010, his non-equity incentive compensation had climbed another 31.8% to $2,383,853.  While Rubel’s stock award compensation decreased 67.8% in 2009 from its 2008 value of $1,436,369, by 2010, it had risen to $1,954,613 — a net increase of 36.1%. Also, his base salary had a net change of only 3.5%, similar to the index trend.

On the business side under Rubel’s leadership in 2010, Collective Brands improved free cash flow, expanded operations in non-U.S. locations, and continued to successfully leverage its hybrid business model of store franchises, store ownership, and wholesale licensing. Further review of its stock price performance, we see some volatility in the stock, which can be expected with implementing business expansion strategy largely focused on international markets. Over a 24-month period, the stock price fluctuated from $9 to $26; at the time of the annual meeting, it was $15, then at year-end 2010, it was $21.

Collective Brands executive compensation recommendation garnered an 88.3% favorable Say on Pay vote from its shareholders at its recent annual meeting held on May 26, 2011. When anything less than a 70% favorable vote is considered a failed vote, 88.3% favorable vote is a commendable accomplishment. It appears Collective Brands success can be attributed to having rebalanced their executive compensation programs to improve transparency while also demonstrating pay-for-performance alignment.

Can the Creativity of Financial Disclosures be Applied to Executive Compensation Disclosures?

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As part of ERI’s on-going data collection efforts for executive compensation, we came across the annual report filed by a company in the United Kingdom, Land Securities. While reviewing the filing for compensation data, the data researchers felt as though they were reading someone’s personal copy of the annual report with “hand-written” comments. The summary pages of the annual reports are mocked up almost like a white board, helping the readers “connect the dots” easily through the presentation.

Is it possible to be more creative with how executive compensation is disclosed? An argument can be made that if CFOs can simplify the “line of sight” to the business results in their disclosures, the compensation committee should be able to do so as well. What if Land Securities’ example was applied to executive compensation disclosures? Would it help the Board explain to shareholders the recommendations they put forward for their top executives?

Proxy disclosures report the required tabular information, yet much of the critical information is footnoted to explain the data. More footnotes do not necessarily equal transparency. An obstacle may historically have been the complexity of the executive compensation programs; however, we are seeing fundamental changes in executive pay packages to improve line-of-sight by replacing discretionary plans with pay-for-performance plans. With the increased rules and regulations governing proxy disclosures, compensation committees and their resources (consultants and internal functional staff members) are rethinking how they convey their recommendations.

For more information regarding Land Securities’ annual report, click here. Visit www.erieri.com to learn more about our executive compensation analytics and tools.

Geographic Pay for Executives

Geographic Pay for Executives

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Pay varies by geographic location for most jobs. Executive positions, however, tend to be treated differently for a variety of reasons.

Salaries for the same job have different competitive levels from one city to the next. The magnitude of the differential from a national norm also varies by income level, with entry-level positions showing the greatest sensitivity to local practices, particularly in places that override the federal minimum wage. Low-income workers are typically tied to jobs close to their homes. Professionals and managers tend to be paid on a regional basis since they are more apt to commute farther or to be recruited away by nearby rival employers; that drives up the area rate to a higher, more stable equilibrium point for their jobs. Directors and top executives operate in a national (if not international) job market for their talents. Local competitive market conditions for jobs tend to create pressures for companies to pay whatever is right for that particular place, but many employers hold their executives to a different (usually national) common standard rate.

Location does make a difference, even in top executive compensation. Researchers who have studied this for over forty years (1) see geographic pay differentials continue up into top executive levels. All else being equal, executive pay still varies by geographic location. Chief executive officers at same-sized hospitals in California earned 25% more than their peers in Indiana, for example.

Nevertheless, there are many reasons why employers don’t pay all jobs according to the local pay pattern.

In the federal government, jobs paid according to the General Schedule can earn localized pay, but the geographic variances stop at the Senior Executive Service and the Executive Schedule levels. Private employers do much of the same. If a company has separate pay by location, then the geographic pay differences are usually greatest at the lowest levels where the entry level jobs are affected by the minimum market-clearing wage rate. Employer pay practice variances tend to change at different job levels, and typically the differentials taper off and stop at some level.

The rationale is, if recruiting targets the national labor market for a particular job level, then national pay scales should be used. If recruiting is from local or regional labor markets for a particular job level, then local or regional pay scales should be used. Also, the total rewards offering for executives tend to make up for these geographic differentials with another form of long-term focused programs.

Even though the actual proofs of geographic pay differentials extending through CEO levels beyond $500,000 are indisputable (2), most employers don’t choose to capture the reality with a separate offset to their top executive salary structures as they do for lower levels. Executive compensation packages are so large and complex that the influence of any one component variable can be hidden or overshadowed by many others. Nevertheless, the reality remains true even at firms of identical size in the same industry (e.g., executives working in Manhattan earn a lot more than they do in central Kansas).  Most organizations find it more appropriate to exclude senior executive jobs from geographical pay differential programs than to call attention to an additional premium added to jobs already paid premium rates.

1 D. Thomsen, “Geographic Differentials in Salaries in the United States,” Personnel Journal (Sept. 1974): 670

2 D. Thomsen, ERI Update, (Vol. 76, Oct 2006): pg. 3, bottom

Earnings Quality and Executive Compensation, Any Correlation?

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Every year industry market analysts evaluate earnings quality. Let’s review what it means to conduct a financial assessment for quality earnings in the context of executive compensation disclosures. Earnings quality is the degree of reliability in reported earnings to reflect a company’s true earnings and to help predict future earnings. What analysts and investors are trying to ascertain from reviewing earnings quality is the company’s sustainable revenues, which is critical input in determining a company’s market valuation and overall long-term organization effectiveness.

Some variables companies use to measure earning quality are:

  • Margins, gross or net.
  • Capital expenditures and R&D relative to industry/peer group.
  • Sales and administrative expenses relative to sales.
  • Significant change in effective tax rate.
  • Cost structure relative to industry/peer group.
  • Change in labor force.

The underlying framework to assess earnings quality is demarcating the earnings capabilities of the company as an ongoing business concern from outliers like one-time charges and acquisition/divestiture issues. For companies that tend to use conservative accounting practices, there’s a bias toward higher earnings quality. Whirlpool and GE beat market expectations for revenue growth this year. When you take a closer look as to how this growth was achieved, it is attributed to energy tax credits, not organic growth in operating profit or a basis in a sustainable revenue stream.

In addition to analysts that give “high” or “low” assessments of companies’ earnings, there are companies such as Starmine (a division of Thomson Reuters) and Standard & Poors that evaluate companies’ earning quality and issue ranking or scores. Starmine’s recent newsletter highlights Three D Systems as a high earnings quality company with a score of 96 (scale of 1 to 100, 100 being the highest) primarily due to Free Cash Flow (FCF), Net Operating Margin, and Return on Net Operating Assets (RONOA). In reviewing Three D Systems proxy disclosures related to executive compensation, the overall level of transparency is excellent. Here are some supporting observations in the proxy:

  • In addition to NEOs’ compensation, the compensation committee reviews all compensation requests for employees earning 200K or more in base salary.
  • Executives’ and employees’ compensation strategy/philosophy is aligned, one in the same.
  • Comprehensive explanation of compensation risk and oversight (could be used for SOX audit).
  • Clawback and hedging policies “proactively” disclosed in proxy; currently, they are recommended, not required disclosures.
  • Specifically mentioned formal succession planning process; knowing they are “on-top” of the leadership pipeline is key to sustainability of the organization’s effectiveness.

To read Starmine’s newsletter and Three-D’s proxy, see http://www.starmine.com/newsletters/index.phtml?newsletter=eqa and http://www.3dsystems.com/investors/datafiles/3DSystems-2011-Proxy-Statement.pdf.