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Most CEOs hit their compensation targets regardless of shifting economic and market conditions, which suggests their targets may be too easy to reach, according to new research from ISS Corporate Solutions Inc.

The advisory firm examined the annual incentives paid to CEOs at S&P 1500 companies and found that more than 70% of CEOs received target or above-target payouts in fiscal 2022.

The financial services sector ranked first, with 85% of CEOs hitting their payout targets; the auto sector ranked last, with 57% reaching their targets.

The research, which looked at the five-year period from 2018 through 2022, also found that the share of CEOs meeting or exceeding their payout targets “remained relatively unchanged despite significant variability in economic conditions.”

“The findings call into question whether boards and compensation committees are setting sufficiently rigorous targets for their CEOs,” the firm said.

“Well-designed performance awards motivate executives to grow their businesses, streamline operations and deliver value to shareholders; but when poorly designed they serve as cash machines for executives delivering mediocre results,” the report said.

“The trend of CEOs receiving at or above target payouts, while consistent with results in recent years, may raise concern with investors in the context of ongoing recession fears and a challenging operating environment for many companies,” said Roy Saliba, managing director with ICS, in a release.

Additionally, the firm’s research found that payout rates were consistently above the 50% to 60% range that, it said, is considered “best practice” by consultants, academics and practitioners.

“When payout rates consistently stray beyond the range of what is considered best practice, it often indicates an underlying issue with the design of the performance plan, whether with the metric selection, the formulation of the payout curve, or goals that are either too easy or too hard to achieve,” said Saliba.

The research also found that, while payouts were correlated with company size — S&P 500 companies had median annual incentive payouts of US$2.3 million compared with US$925,000 for the S&P 600 — the growth rate was similar for all firms, with median payouts growing by 19% since 2018.

The median payout for annual incentive awards fell to US$1.4 million in 2022 from US$1.75 million in 2021, the firm said.

“The decline is not entirely surprising because companies generally performed better in 2021 as they rebounded from shutdowns, travel restrictions, supply chain disruptions and other pandemic-related challenges,” the report said.