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Middle Market CEO and CFO Pay Increases Show Momentum

November 16, 2016

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2015 middle market executive compensation trends foreshadowed momentum companies are seeing in 2016. In Q2, the National Center for the Middle Market reported 7.2 percent revenue growth over the previous year, and while companies entered the year with some caution, 2015 pay reflected improving performance. According to the BDO 600: 2016 Survey of CEO and CFO Compensation Practices of Mid-Market Public Companies, middle market CEO compensation increased by 3.2 percent in 2015, reaching an average of $3.8 million, and CFO compensation increased by 4.1 percent, reaching nearly $1.5 million. While the increases are moderate, middle market executives fared better than employees overall, who received an average 2.9 percent salary increase in 2015, according to the Economic Research Institute.

Continuing the trend in pay-for-performance, 63 percent of 2015 CEO pay was in long-term incentives. CFO pay, on the other hand, is more evenly split with 55 percent in long-term incentives and 45 percent in annual cash. The top job at middle market companies continues to out-earn other C-suite executives: Total compensation for CFOs averaged about 38 percent of total CEO pay.

“Executives at middle-market companies are cautiously bullish,” says Randy Ramirez, Managing Director in the Global Employer Services practice at BDO USA, LLP. “Compensation increases reflect a modest but positive year, and despite a few economic challenges and uncertainty around election outcomes, 2016 growth may even be better.”

Tech, Healthcare, Real Estate & Energy Execs Earn Top Pay

As technology continues to disrupt and enhance business across all industries, tech companies are seeing strong results. Technology CEO and CFO pay surpassed other industries in 2015, increasing 19 percent to $5.7 million and 13 percent to $2 million for CEOs and CFOs, respectively. The differences in founder-CEO pay packages may be a contributor to the industry’s leading compensation, as well as the inherent volatility in technology equity.

The banking sector, amid continued increased scrutiny of executive pay spanning almost 10 years and recent high-profile clawbacks, saw the second-highest increase in CEO pay, rising 8 percent to $751,174, but still posted the lowest total compensation among the industries studied. Healthcare CEOs narrowly edged out real estate CEOs for the second-highest compensation. Significant transformation and financial and operational challenges in the healthcare industry, however, did not translate into higher CFO compensation. Among CEOs, modest decreases were also seen in the energy and retail sectors as the former contended with industry contraction and macroeconomic factors, and the latter with headwinds in consumer spending and business strategy.

Still, it’s not all bad news for the retail and energy industries. Retail CFO pay increased a notable 38 percent, largely as a result of higher bonus payouts and larger stock grants. Despite a 6 percent decrease in pay, energy CFOs were still the third-highest paid among all industries.

“Executive compensation plans continue to be hotly debated in the public as industries like financial services and healthcare grapple with increased scrutiny from stakeholders, lawmakers and consumers around pay practices and performance with continued calls for even more transparency. We expect performance metrics will continue to grow in importance, as will communication plans to help earn shareholder approval,” says Ramirez.

Pay Mix Reflects Industry Realities

Technology executives continue to see the largest percentages of stock and long-term investments in their pay packages, while non-banking financial services executives earned a more mixed package with bonuses making up roughly one-third of their overall compensation. Banking executives earned the highest percentage of their pay in salary as the only industry to see more than 50 percent of both CEO and CFO pay in cash. Overall, banking CEOs earned an average of 77 percent in cash and 23 percent in long-term incentives, a notable difference from the average across all companies (37 percent cash; 63 percent long-term incentives). This reflects the continued pressure on banking equity as the underlying vehicle for executive pay as well as CEO demands for more guaranteed compensation to lead in a challenged industry.

Higher Pay & Higher Risk in Large Companies

While executive pay continues to correlate with company size, the survey revealed a few notable differences in category pay trends. CEO pay increased the most at mid-sized companies in the study, rising 6 percent over 2014; however, CFO pay increased the most (6 percent) at the largest companies. While total compensation is highest at larger companies, so too is the proportion of variable compensation in the form of bonuses, stock and long-term incentives. Among the largest companies, just 15 percent of CEO pay is salary, compared to 24 percent for smaller companies. For large-company CFOs, 22 percent of pay is salary, compared to 34 percent for smaller companies.

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