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By Jacob Rund
Fiscal 2017 could be a banner year for executive compensation, with early indications pointing to the largest pay increases for U.S. CEOs since 2010.
Institutional Shareholder Services Inc., in a new report covering the first batch of fiscal 2017 pay data disclosures, pegged the median increase at 9.5 percent for companies on the S&P 500 Index that already reported.
Market confidence and lucrative stock awards helped fuel this pay spike, which appears to be most prominent in a “more industrial base” of businesses, ISS Analytics’ chief John Roe told Bloomberg Law.
The proxy adviser’s data show that Cleveland-area companies, including paint maker Sherwin-Williams Co., have the highest median CEO pay increase compared with early filers from all other regions.
“General optimism” about the business climate in the second half of 2016 and early 2017 spurred larger stock grants, which played a big role in the increases seen thus far, Roe said. Strong stock market performance was also a contributing factor, Roe said, as it drove bigger incentive payouts.
Although many public companies have to yet to disclose their fiscal 2017 pay data, the final median CEO pay increase isn’t likely to be less than 4 percent or 5 percent and could near the preliminary findings, according to Roe.
ISS reviewed the reported pay of “same-store” CEOs — those who held the position for the two most recent fiscal years and were the only CEO at their company.
The 9.5 percent median raise was based on CEO data from 166 companies in the S&P 500 Index and factored out changes in pensions and certain deferred compensation plans.
The median pay raise for same-store CEOs, minus pension and deferred compensation, was 5 percent in fiscal 2016 and 3.8 percent the prior year, ISS data show. If the 9.5 percent median increase among early S&P 500 filers holds true for all remaining companies, it would be the highest since the 15.4 percent increase in fiscal 2010.
ISS also looked at the biggest fiscal 2017 pay increases by region. The Cleveland area had a median raise of 30.2 percent — more than double the median of early filers in the Chicago area, which had the second-highest number.
Sherwin-Williams Co. reported a 40 percent increase, while Cleveland-based aerospace products developer TransDigm Group Inc. gave a 223 percent raise to its CEO. Companies based in and around the Arizona cities of Phoenix, Mesa, and Scottsdale had the top median pay increase for fiscal 2016 at 16.5 percent.
The CEOs of manufacturers and other industrial companies pulled in bigger raises than non-production-based firms, like banks, which historically reported smaller executive pay increases, Roe said.
Fiscal 2018 looks to be “a real wild card” for CEO pay raises, Roe said, attributing much of the uncertainty to the federal tax law overhaul enacted last year.
The elimination of tax breaks for performance-based pay means a potential shake-up for companies’ compensation structures. Streaming video company Netflix Inc. changed its executive compensation policy in December to move away from performance-based bonuses.
ISS data show that, since fiscal 2009, years with a 6 percent or greater median CEO pay raise for S&P 500 firms have been followed by a smaller increase. After the 15.4 percent median raise of 2010, the 2011 median pay increase was 5.4 percent.
And years with large median pay raises don’t always trigger a negative investor response, Roe said. Shareholders “are willing to be more forgiving” of growing executive pay packages when a company is performing well.
When shareholders are happy with financial results, “they are generally more apt to give companies a pass on compensation,” Roe said. “That’s generally what we’re going to see moving forward.”
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