Looking Ahead to Executive Pay Practices in 2020 Executive Summary

Looking Ahead to Executive Pay Practices in 2020

Executive Summary Table of Contents

. Introduction 3 . Compensation Committee Oversight 5 . The Expanding Role of the Compensation Committee 6 . Executive Compensation Philosophy 7 . Target Pay Positioning 8 . Pay Projections 9 . Annual Incentives 10 . Long-Term Incentives 11 . Gender Pay Equity, Diversity & Inclusion 12 . Shareholder Advisory Group Influence and Shareholder Outreach 13 . Executive Pay and ESG-Related Performance 14 . Demographics 15 . About Pearl Meyer 17

Pearl Meyer On Point: Looking Ahead to Executive Pay Practices in 2020 2 Introduction

Pearl Meyer’s “Looking Ahead to Executive Pay Practices” is an annual, online survey and valuable compensation planning tool. This year’s survey was conducted in August and September of 2019, with participation from 199 companies, including 127 publicly traded, 50 private for-profit, and 22 not-for- profit (NFP) organizations. As with prior surveys, responses are broken out separately by respondent role (board member versus employee), ownership type, industry, and company revenue size. This year’s survey addresses several fundamental compensation philosophy issues, such as primary program objectives and target pay positioning versus market. It also reports on expected pay outcomes for Fiscal 2019 and projected pay opportunities for 2020, incentive plan design changes, and diversity, inclusion, and gender pay. Topics relating to proxy advisor firm influence, shareholder outreach, and use of Environmental, Social & Governance (ESG) incentive plan metrics are also explored for public company respondents.

Pearl Meyer On Point: Looking Ahead to Executive Pay Practices in 2020 3 Introduction (cont.)

This year’s survey includes the following seven industry groups: business and other services; consumer discretionary/staples; financial/insurance/real estate; healthcare; industrials/materials/transportation; technology; and energy/utilities. Certain industry categories in the online questionnaire were combined to allow for more meaningful sample sizes. Statistics are based on the number of responses for each question, and sample sizes vary. We believe results of this survey will serve as a useful tool as your organization prepares for year- end pay determinations and Fiscal 2020 compensation planning. Please feel free to contact me with any questions.

Bill Reilly Managing Director [email protected] 770-261-4082

Pearl Meyer On Point: Looking Ahead to Executive Pay Practices in 2020 4 Compensation Committee Oversight

. Compensation committee oversight responsibilities vary by ownership type—pay is reviewed for all corporate officers at 45% of public company respondents compared with only 10% at privately held organizations.

Which executive positions does your board's compensation committee review?

70% 64% 60% 60% 48% 50% 45% 42% 40%41% 41% 40% 37% 32% 30%

20% 10% 10% 10% 5% 6% 0% 0% CEO only Named executive Direct reports to All Section 16 Other officers the CEO officers

Public Private for-profit Private not-for-profit

Pearl Meyer On Point: Looking Ahead to Executive Pay Practices in 2020 5 The Expanding Role of the Compensation Committee

. The role of compensation committees continues to expand, with most responsible for non-employee director compensation (75%) and executive succession planning (69%), and a growing number having oversight for leadership and talent development (39%), diversity and inclusion (29%), and culture/employee engagement (26%). Responses are generally consistent across ownership types.

In addition to executive compensation, which of the following responsibilities are currently under the purview of your board's compensation committee?

Other

Diversity and inclusion

Leadership and talent development

Corporate culture and employee engagement

Executive Succession Planning

Board of director compensation

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Private not-for-profit Private for-profit Public

Pearl Meyer On Point: Looking Ahead to Executive Pay Practices in 2020 6 Executive Compensation Philosophy

. Most respondents (56%) have a formal, written executive compensation philosophy, with prevalence higher for public companies (61%) versus private for-profit (44%) and NFP (50%) organizations; prevalence also increases with company size. . When asked to list and rank the top three executive compensation program objectives, the most commonly cited responses (rounded) were as follows:

% Most % 2nd Most % 3rd Most % Within Objective Important Important Important Top 3 Align pay with performance & value 44% 30% 11% 85% creation Reinforce key business 21% 29% 20% 70% objectives

Align executive & 19% 18% 13% 50% shareholder interests

Pearl Meyer On Point: Looking Ahead to Executive Pay Practices in 2020 7 Target Pay Positioning

. Most respondents target executive compensation at the 50th percentile, especially for base salaries. . Responses are generally consistent across ownership types, with private for-profit organizations slightly more likely than public companies to target total direct compensation (salary + STI + LTI) above the 50th percentile (37% vs. 32%) . Most respondents (63%) have not changed targeted pay positioning, while 25% increased or expect to increase positioning due to competitive pressures and/or use of stretch incentive goals.

Targeted Pay Positioning (% of All Respondents) Pay Component Below 50th Above 50th At 50th Percentile Percentile Percentile Base Salary 10% 66% 17% Short-Term 6% 55% 26% Incentives (STI) Long-Term 8% 47% 28% Incentives (LTI) Total Direct 7% 53% 32% Compensation

Pearl Meyer On Point: Looking Ahead to Executive Pay Practices in 2020 8 Pay Projections

. Average base salary increase projections for 2020 equal 2.9% for the CEO and direct reports and 3.0% for other employees; median values equal 3.0% across all categories. . Most respondents plan to increase senior executive salaries in 2020 (71% for the CEO and 85% for direct reports). . Most respondents (78%) expect STI awards for 2019 to be at or near (within +/- 20%) of target award opportunities; only 3% expect no payouts to be earned. . Most respondents (51% of the entire sample and 56% of public companies) expect 2020 grant date LTI award values to be similar to 2019, with 21% forecasting higher values and 12% lower amounts.

Private for- Private not-for- Public profit profit Anticipated average base 2.3% 3.5% 4.5% salary increase for the CEO Anticipated average base salary increase for the CEO's direct 2.7% 3.1% 3.8% reports Anticipated average base salary increase for non-executive 2.9% 3.1% 3.3% employees

Pearl Meyer On Point: Looking Ahead to Executive Pay Practices in 2020 9 Annual Incentives

. Most companies (79% of all respondents and 87% of public companies) have formulaic plans for senior executives with pre-defined weightings for metrics and award opportunities and a primary emphasis on corporate/business unit financial goals. . Senior executive annual incentive award opportunities are primarily tied to objective financial goals at the corporate/business unit level, with no significant changes expected. . Half of all respondents recently made or are considering annual incentive plan design changes, with the most common change being the addition of new financial metrics (21%).

Average Performance Mix for Annual Actual or Planned Annual Incentive Incentives Design Changes 21% 78% 78% 76% 75% 16% 13% 10%

14% 8% 14% 8% 14%11% 14%12% Add new Increase Add new non- Increase CEO (2019) CEO (2020) Direct Reports Direct Reports financial metrics emphasis on financial metrics emphasis on (2019) (2020) objective individual goals metrics Corporate/Business Unit Financial Corporate/Business Unit Non-Financial Individual

Pearl Meyer On Point: Looking Ahead to Executive Pay Practices in 2020 10 Long-Term Incentives (LTI)

. LTI award vehicle prevalence varies by ownership type, with most public companies granting performance-based equity (78% of respondents) and/or time-based restricted stock/units (84%) to senior executives, and private for-profit companies also providing performance-based cash (“cash LTIP” 32%) and phantom stock (24%). . Most public companies (86%) and half of private for-profit respondents establish target LTI award values for senior executives. Target LTI value mix varies by ownership type. . Among respondents with LTI plans, 43% (45% public, 33% private for-profit) made or are considering one or more design changes for 2020, with the most common actions being: add new metrics (23%); change existing award mix (10%); and add new vehicles (8%).

Projected 2020 Average LTI Value Mix for CEOs On average, performance-

based equity 14% represents nearly 48% half of the total 32% target value mix for 100% 33% public companies 34% and one-third for 9% 14% 13% private for-profit Public Companies Private-For-Profit NFP respondents. Stock Options Time-Based Equity Performance-Based Equity Cash LTIP Phantom Stock

Pearl Meyer On Point: Looking Ahead to Executive Pay Practices in 2020 11 Gender Pay Equity, Diversity & Inclusion

. Most respondents (59%) have conducted an internal assessment of gender pay equity (comparable pay for comparable work) and many (35%) have also reviewed gender pay gaps (relationship of median pay for female versus male employees); prevalence of gender pay reviews increases with company size. . While most respondents say promoting gender pay equity is an organizational priority, nearly half (47%) don’t share any information on this subject with the board. . Only 13% of respondents (15% for public companies) currently tie or plan to tie a portion of CEO annual incentives to diversity and inclusion metrics.

Gender Pay/Diversity Information Shared with the Board

None 47%

% of Women in Leadership Roles 34%

Pay Equity Assessment 25%

Pay Gap Assessment 20%

Promotion Rates for Women 18%

% of Women Among High Potentials 18%

Pearl Meyer On Point: Looking Ahead to Executive Pay Practices in 2020 12 Shareholder Advisory Group Influence and Shareholder Outreach (Public Companies Only)

. Most respondents say shareholder advisory groups (such as ISS and Glass Lewis) have some but not significant influence over executive compensation design and practices. . Only 5% of respondents currently use or plan to add Economic Value Added (EVA) as an incentive plan metric in Fiscal 2020, while 24% may consider adding EVA in future years and 51% have no plans to add it. . Half of all public company respondents conduct annual shareholder outreach and 30% do so periodically but not every year. Respondents are more likely to just include management (44%) versus also including the compensation committee (26%) and/or other non-employee directors (25%).

Shareholder Advisory Group Influence

Unsure, 8%

None, 9% Signficant, 22%

Some but not much, 61%

Pearl Meyer On Point: Looking Ahead to Executive Pay Practices in 2020 13 Executive Pay and ESG-Related Performance (Public Companies Only)

. Only 14% of public company respondents currently use or plan to include ESG metrics within senior executive incentive plans. . For those that do, respondents are more likely to include environmental metrics (67%) as compared with social (33%) or governance (25%) goals. . When used, ESG metrics typically represent 5% to 10% of incentive award opportunities and typically apply for all plan participants.

Are there one or more ESG metrics What type(s) of ESG metrics do you use? formally built into your incentive plan(s)? 12% 2% 25%

67% 33% 86% Yes No, but we plan to add one or more in 2020 No, and we have no plans to add any in 2020 Environmental Social Governance

Pearl Meyer On Point: Looking Ahead to Executive Pay Practices in 2020 14 Demographics

Form of Ownership Respondent Role

11% 17%

25%

64% 83%

Public Private for-profit Private not-for-profit Outside director Employee of the firm

Revenue range (or asset size for financial institutions) for the most recently completed fiscal year

$30 billion or greater 8% $20 billion to less than $30 billion 2% $10 billion to less than $20 billion 9% $3 billion to less than $10 billion 23% $1 billion to less than $3 billion 20% $500 million to less than $1 billion 12% $300 million to less than $500 million 5% $100 million to less than $300 million 8% Under $100 million 14% 0% 5% 10% 15% 20% 25%

Pearl Meyer On Point: Looking Ahead to Executive Pay Practices in 2020 15 Demographics

US or Global

14% 49% 37%

U.S. only Global, with less than 50% of revenue generated outside the US Global, with more than 50% of revenue generated outside the US

Industry Representation

Utilities 2% Transportation 5% Technology 9% Real Estate 5% Materials 4% Industrial 8% Healthcare 15% Financial 26% Energy 6% Consumer 13% Business Services 9% 0% 5% 10% 15% 20% 25% 30%

Pearl Meyer On Point: Looking Ahead to Executive Pay Practices in 2020 16 About Pearl Meyer

Pearl Meyer is the leading advisor to boards and senior management on the alignment of executive compensation with business and leadership strategy, making pay programs a powerful catalyst for value creation and competitive advantage. Pearl Meyer’s global clients stand at the forefront of their industries and range from emerging high-growth, not-for-profit, and private companies to the Fortune 500 and FTSE 350. The firm has offices in New York, Atlanta, Boston, Charlotte, Chicago, Houston, London, Raleigh, and Los Angeles.

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