Boyden Executive Search

Only nine of the executives on the list of 50 highest-paid received a bonus per se. Instead, they got more through other compensation categories.

This article was originally published on Pittsburgh Business Times website. Click here to view the original article.

By Patty Tascarella  – Senior Reporter, Pittsburgh Business Times

Parse the proxy of Pittsburgh’s biggest bank, and PNC Financial Services Group Inc. did not award a bonus to its top executive in 2018.

Well, actually, it did, at four times the amount of the base salary PNC paid William Demchak, chairman, president and CEO. The $4.4 million was listed under nonequity incentive plan compensation, effectively a bonus by another name, as the category is a catch-all.

PNC is by no means unique. Only nine of the public company executives on the Business Times’ annual ranking of the 50 highest-paid execs was awarded a bonus per se, compared with 12 last year. But 47 received money via nonequity incentive plan compensation.

Combined total compensation for the 50 highest-paid public company executives based in Pittsburgh was $345 million in 2018, a 17.1 percent jump from 2017. Total compensation includes salary, bonus, stock awards, option awards, nonequity incentive plan compensation, change in pension value and nonqualified deferred compensation and all other compensation, as reported in the summary compensation table of company proxy statements for the most recent available fiscal year.

Compensation tied to performance remains a key to how executives are paid, and it continues to pay off for them, even through the stock market stumbles last year. But how companies will twist and translate this formula beyond bouncing the bonus categorically has yet to play out.

“CEO pay continues to move ever upward, and it’s reminiscent to me of recruiting people for professional sports teams,” said Thomas Flannery, managing partner at executive search firm Boyden. “It’s very competitive. The compensation committees have moved away from automatic bonuses. A lot of companies will have a target bonus, but if it’s not earned, it’s more likely to be a case of they didn’t hit the target.”

Nationally, executive pay at U.S. public companies marked a slight drop in 2018 after a steady climb since 2013, according to Equilar, a Redwood City, California-based research firm specializing in compensation, recruitment and shareholder engagement. The consulting firm’s content manager, Amit Batish, wrote in a report that the slip might be an indication of the shareholder community pushing for executive pay to be tied more closely to performance.

Among Pittsburgh’s highest paid, it was stock awards that pushed compensation higher. Three of the top four each tallied more than $9 million. Few names on the list were new, but Ronald Keating, CEO of Evoqua Water Technologies Corp., debuted at No. 4. The company, whose fiscal year ends Sept. 30, went public in November 2017. Keating’s compensation of $12.3 million included $9 million in stock awards. Evoqua did not respond to a request for comment.

Kenneth Lehn, Samuel A. McCullough Professor of Finance at the University of Pittsburgh’s Katz Graduate School of Business and a former chief economist at the U.S. Securities and Exchange Commission, said that while companies and investors benefit from the rising tide — despite a stock market decline last year, the stock market surge in 2016 and 2017 still kept share prices relatively high — that doesn’t say how much credit is truly due to the CEO.

“With stock awards, for the most part, if your share price goes up and it’s not that you’ve been outperforming the market, you get the value, but the value doesn’t distinguish which source is driving the matter,” Lehn said.

Demchak led the list with total compensation of $15.7 million, just $1.1 million of which was base salary. Stock awards were $9.5 million, up from $6.7 million the prior year.

At PNC, four other executives also made the Top 50 list. While Demchak declined to comment for this story, PNC provided an outline of how its compensation process works: The Personnel and Compensation Committee of PNC’s board sets Demchak’s compensation by approving a set of executive compensation principles that include paying for performance; aligning compensation with long-term shareholder value creation; attracting, retaining and motivating executives; and discouraging excessive risk-taking.

The committee evaluates both corporate and individual performance, looking at multiple measures. Total compensation targets are set for the bank’s named executive officers, and the long-term incentive awards make up at least 50 percent of the value of the target. For Demchak, this proportion increases to 60 percent.

Another area that continues to increase is equity-based compensation, part of which is stock growth. For now. When signs of a recession start, companies may rethink stock awards.

“I’ve been curious about whether companies will pull back on that,” said Shad Fagerland, senior manager at Schneider Downs & Co. Inc.’s SDAdvantage Retirement Solutions LP subsidiary and a former lawyer at the Office of Chief Counsel at the Internal Revenue Service. “Will they retrench and move into options?”

More than half, or 26, of the local top 50, were awarded options as part of 2018 pay.

Pay for performance also is likely to play out in new ways going forward, some of which are being explored.

Flannery wouldn’t be surprised if, given the scandals such as the exploitation and poor treatment of women brought to the forefront by the Me Too movement, that may impact how executive pay is structured.

“I have no objective to paying high salaries to CEOs and other C-suite execs — but the compensation has to be tied to performance and, in my estimation, it also has to be tied to behavior,” Flannery said. “There are more situations where CEOs can get themselves in trouble. They really have to toe the line these days, probably more than ever.”

Fagerland said there are companies that are shoring up moral clauses to protect the business. “As a result of sexual harassment, some companies are quietly introducing things into executive contracts,” Fagerland said. “For example, ‘We can claw back your bonuses if you’re removed and it has anything to do with sexual harassment.’”

This year, shareholders at four of the biggest banks in the country — Bank of America Corp., Wells Fargo & Co., JPMorgan Chase & Co. and BNY Mellon — filed proposals to provide more compensation data with the aim of closing the gender pay gap. None passed.

Still, change may be coming on other fronts. After its shareholder meeting in late December, Royal Dutch Shell, which is based in The Hague, Netherlands, said it would tie executive compensation to carbon emission targets.

“That’s not a U.S. corporation, which is interesting, but I’d like to see more of it,” Fagerland said. More incentive-based compensation is “pretty directly the result of activist shareholders,” Fagerland added. “I think the next thing to hit will be directors’ pay,” he said. “Shareholders aren’t necessarily protecting it, which is an interesting development.”

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