About half of companies aren't using the right executive compensation performance objectives, according to a study released Thursday by the Florida State Board of Administration.
In about half of the 1,800 companies reviewed, performance objectives used to determine long-term incentive executive compensation are generally well-aligned with shareholder value. However, those used by the other half of companies are moderately or poorly correlated to shareholder value in the other half, according to the study, “Performance Metrics and Their Links to Value.”
“The study shows a lot of well-designed incentive structures” for executive compensation, Michael P. McCauley, senior officer, investment programs and governance at the $162.3 billion Tallahassee-based FSBA.
FSBA commissioned Farient Advisors to do the study, which covered 1,800 companies in 24 industries over a 14-year period, 1998 to 2011.
The research examined “how effective are the individual performance objectives embedded within virtually all compensation structures and how closely are they tied to the company's stock price,” according to an FSBA report on the study.
Half of the 24 industry groups use metrics that most highly correlate to shareholder value, many of them including in their metrics total shareholder return, the study said.
Eight industry groups used metrics moderately tied to shareholder value and four industry groups used metrics poorly correlated, the study said.
Among companies using performance-based long-term incentives, 53% use a mix of total shareholder return and corporate financial measures in their long-term equity plans, the study found. Some 28% use financial measures only and 15% use total shareholder return only.
“The allocation of performance measure usage underscores the need to identify the right metrics for a given firm,” the FSBA report said.
Jack Zwingli, leader, information services at Farient Advisors, and a co-author of the study, said in an interview, “In general, we didn't see much difference between small and large companies. Larger companies use more performance-based metrics than smaller companies.”