Executive Compensation and its Link to Financial Results

Executive Summary – Overall Trends in Performance and Pay

U.S. executives were presented with an increasingly challenging business environment in 2005:

• US GDP growth slowed to 3.5% in 2005 versus 4.2% in 2004. (Source: U.S. Department of Commerce, Bureau of Economic Analysis)
  
• Corporate profit growth slowed to 13.2% in 2005, down significantly from the 2004 increase of 23.7%.
  
  
  
  • Interestingly, when energy companies are excluded from these corporate profit growth rates, the yearover-year change is even greater; profit growth declined from 20.8% in 2004 to 8.9% in 2005. (Source: Standard & Poor’s)
    
  
  
• The stock market slowed considerably from 2004:
  
  
  
  • The NASDAQ Composite Index increased by only 1.37% in 2005, substantially less than 2004’s increase of 8.59%.
    
  • The NYSE Composite Index grew a respectable 6.95% in 2005, however this represented roughly half of the appreciation in 2004 of 12.16%.
    
  • The S&P 500 Index grew by 3.00% in 2005, although this is substantially less than the 8.99% growth rate in 2004.
    

Technology industry firms were not exempt from softening economic conditions: Among the DC&P Tech100 firms (the largest 100 technology industry firms, by revenue), revenue growth fell from 13% in 2004 to 10% in 2005, net income growth fell from 38% in 2004 to 21% in 2005, and total shareholder return fell from 19% in 2004 to 2% in 2005.

Reflecting weakening company financial performance in 2005 among DC&P Tech100 firms, growth in executive compensation slowed considerably from the increases of recent years. CEO base salaries at DC&P Tech100 firms increased 3.7%, bonuses increased 5.0%, long-term incentive grant values were flat (0.0% change), and total direct compensation increased 8.9%.

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