More top companies giving CEOs performance-based awards

August 11, 2014, 5:26 PM UTC
contract armin harris
Kyle Bean for Fortune

When it came time to reward top executives last year, more leading companies handed out performance-based awards instead of time-vesting stock options, according to a new study from human resources consulting firm Mercer.

The study, released Monday, shows performance shares were used as CEO rewards by 51% of companies surveyed last year, up from 47% the previous year and 41% in 2011. Meanwhile, the number of companies surveyed by Mercer who rewarded their CEOs with time-vesting restricted stock fell to 22% last year from 23% in 2012.

Overall, the use of option grants fell last year to just 25% from 28% the previous year and 35% in 2011. Those numbers reflect the activities of more than 240 companies from the S&P 500.

Performance shares are company stock given to managers only if they meet certain company-wide performance targets. Ted Jarvis, Mercer’s global director of data, research and publications, sees the move toward these stock awards is due to a perception that full-value shares are tied more closely to a company’s immediate results.

“In practice, performance awards are more closely aligned to explicit financial or operational outcomes than stock options,” Jarvis said in a statement. “However, the performance measures and associated goals must reflect the company’s strategic objectives for performance shares to be meaningful incentives.”

Mercer found that the average total compensation for CEOs, which includes short-term and long-term payouts as well as base salary, increased 6.5% last year, to $9.66 million. Last year’s median compensation is up 8.5% from the $8.86 million posted in 2011, Mercer said. Mercer also found median compensation to be pretty top-heavy, with CEOs at companies in the top 100 of the S&P 500 raking in an average of $14.4 million last year, 68.5% higher than the $8.55 median compensation for CEOs in the rest of the S&P 500.

However, median compensation for CEOs at smaller companies did increase 6.7% last year, while pay for CEOs at the top 100 companies was down slightly, which Mercer says could reflect efforts by the smaller companies to offer compensation packages that are competitive with those offered by their larger peers.

Jarvis says that practice, fueled by smaller companies handing out greater annual bonuses and long-term incentives, could have negative results.

“If this trend continues, we may witness pay compression as the smaller companies catch up with the big ones,” he said.