The Current Landscape of CEO Long-Term Incentives

Among Large, Mid & Small Cap Companies

CEO Long-Term Incentives

• Steven Hall & Partners (SH&P) reviewed long-term incentive

compensation for 300 CEOs, 100 in each of the following indices

– Large Cap S&P 500

– Mid Cap S&P 400

– Small Cap S&P 600

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CEO Pay Mix

• Long term incentives account for the majority of CEO compensation

among all three groups

• Large cap companies pay the highest average percentage of CEO

total compensation in long term incentives at 68%

– Small cap companies pay the lowest at 51%

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13%

17%

26%

19%

21%

23%

68%

62%

51%

Large Cap

Mid Cap

Small Cap

Base Salary Annual Incentive Long Term Incentive

CEO Long-Term Incentive Mix

• Performance-based long-term incentive plans (LTIPs) account for

over half of long-term incentives awarded to large and mid cap

CEOs

• Stock options rank second among large cap companies

• Service-based restricted stock ranks second among mid and small

cap companies

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28%

20%

20%

19%

27%

35%

53%

53%

44%

Large Cap

Mid Cap

Small Cap

Options Restricted Stock LTIPs

CEO Long-Term Incentive

Prevalence

• Performance-based incentives nearly universal among large and

mid cap companies

• Stock options more prevalent at large cap companies

• Service-based restricted stock more prevalent at small cap

companies

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65%

55%

92%

50%

64%

91%

44%

74% 72%

Stock Options Service-Based Restricted Stock Performance-Based LTI

Large Cap Mid Cap Small Cap

CEO Long-Term Incentive

Prevalence

• Majority of companies in each index grant two LTI vehicles

• Large and mid cap companies least likely to award only one LTI

vehicle

• Small cap companies least likely to award three LTI vehicles

5

17%

54%

29%

18%

59%

23%

29%

52%

19%

1 Vehicle 2 Vehicles 3 Vehicles

Large Cap Mid Cap Small Cap

CEO Long-Term Incentive

Prevalence

• Companies awarding two vehicles typically grant one time-based

and one performance-based LTIP award

• Performance-based LTIP is most common among companies

awarding only one vehicle

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2% 2%

13%

4%

30%

20%

29%

2%

16%

7%

18%

34%

23%

6%

11% 12% 11%8%

33%

19%

Options R/S LTIP Options & R/S Options & LTIP R/S & LTIP Options, R/S & LTIP

Large Cap Mid Cap Small Cap

1 Vehicle 2 Vehicles 3 Vehicles

Performance-Based AwardsPerformance Period

• Majority of payouts under CEO LTIPs based on a three year

performance period

• Notable minority of mid and small cap companies base payout on

only one year of performance

– Most require an additional two to four years of service-based

vesting after performance period ends

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2% 2%

90%

2% 3%18% 4%

76%

2%15%8%

72%

1% 3%

1 Year 2 Years 3 Years 4 Years 5+ Years

Large Cap Mid Cap Small Cap

Performance-Based Awards# of Performance Metrics

• Majority of companies use more than one performance metric to

determine LTIP payouts

– 64% of large cap companies

– 58% of mid cap companies

– 51% of small cap companies

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36%

29%25%

10%

42%47%

7%4%

49%

33%

17%

1%

1 2 3 4+

Large Cap Mid Cap Small Cap

Performance-Based AwardsPerformance Metric Prevalence

• Relative TSR is most prevalent metric among large cap companies

• Earnings metrics most prevalent among mid and small cap

companies

• Other less prevalent metrics observed include returns (ROA, ROE,

etc.), revenue and cash flow

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60%

43%

37%

21%

12% 9%

8% 5%

41%

51%

27%

20%4%

10%3%

8%

31%

54%

25%22%

8%

13% 3%7%

Relative TSR Earnings Returns Revenues Cash Flow Other Financial Other Non-Financial

Absolute TSR

Large Cap Mid Cap Small Cap

Service-Based VestingStock Options

• Majority of CEO stock options vest over three or four years

• Stock options typically have a step vesting schedule

– Vest in increments over the vesting period

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2% 2%

57%

38%

2%2%

46%44%

8%5%

41%43%

11%

1 Year 2 Years 3 Years 4 Years 5+ Years

Large Cap Mid Cap Small Cap

89%

92%

95%

Large Cap

Mid Cap

Small Cap

Step Cliff

Service-Based VestingRestricted Stock

• Three years is the most common vesting period for service-based

restricted stock

• Step vesting most prevalent for restricted stock awards

– Cliff vesting used by a more sizeable minority for restricted stock

than for stock options

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4%

64%

31%

2%

67%

22%

11%3%

61%

30%

7%

2 Years 3 Years 4 Years 5+ Years

Large Cap Mid Cap Small Cap

64%

72%

80%

Large Cap

Mid Cap

Small Cap

Step Cliff

About Steven Hall & Partners

Steven Hall & Partners is an independent executive compensation consulting firm serving

as outside counsel to boards, compensation committees and management. The firm

focuses solely on executive compensation, director remuneration and related corporate

governance matters.

For more information

Web: www.shallpartners.com

Email: shp@shallpartners.com

Phone: 212.488.5400

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