This year’s executive orders have caused many U.S. companies to re-examine where they source raw materials. Given the capital-intensive nature of the industrial manufacturing industry, this topic is being discussed in boardrooms across the country. We examined recent CEO pay trends at 85 S&P 1500 industrial manufacturing organizations in the United States.
Through this analysis, we found that:
Industrial manufacturing is not a specific industry or sector within the global industry classification standard (GICS) or standard industrial classification (SIC) classifications. We therefore defined the industry by capturing a handful of GICS industries within three GICS sectors. No other industries from other GICS sectors were included in the sample (Table 1).
| Sector | Materials | Industrials | Consumer discretionary |
|---|---|---|---|
| Industry/groups: Included |
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Capital goods:
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| Industry/groups: Excluded |
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When we compared 2024 CEO target-pay increases to those in the general industry, industrial manufacturing CEOs slightly outpaced their peers. Figure 1 compares median CEO pay increases for the two industry groups.
Consistent with the broader market, target total direct compensation increases (TTDC) tend to outpace base salary increases, as companies in both groups tend to keep fixed pay relatively steady and focus increases on variable and performance-based pay elements, such as annual bonuses and long-term incentives (LTI).
Short-term incentive (STI) outcomes in the industry don’t vary much from their general industry peers, with payouts for 2023 and 2024 performance in the 108% to 115% range from both samples.
However, when the performance-based portion of LTIs is examined, we see more differentiation, with payouts for cycles ending 2023 averaging 139% of target for industrial manufacturing and 129% for general industry — 10 percentage points lower.
The cycle ending in 2023 tended to be a high-water mark for many organizations (not just industrial manufacturers) as the global pandemic drove financial uncertainty in early 2021 and organizations were hesitant to set stretch performance goals under that shroud. Payouts for LTI cycles ending in 2024 returned to the magnitude we typically expect, and differentiation between the two industry groups is muted (Figure 2a and 2b).
Industrial manufacturers tend to measure and gauge success differently from other organizations. As a result of the intensive capital requirements in the industry, boards of directors hold management accountable for cash flow and operational profitability to a greater degree than general industry. Prevalence of asset measures (e.g., return on assets) is three times as high in the industrial manufacturing sample, and cash-flow measures are used approximately 70% more frequently.
Industrial manufacturers are less likely to measure top-line revenue or bottom-line earnings per share (EPS)/net income. We also examined the number of performance measures used in STI plans and found no material difference in the quantity of measures, with more than half of both samples including three to six distinct measures (Figure 3).
Arguably the most material finding of this study was that total shareholder return (TSR) is not the dominant performance measure in industrial manufacturing. While many general industry organizations tend to use TSR given its direct alignment with shareholder outcomes and relative ease in setting performance goals, increasing the stock price — specifically on a relative basis — is generally harder for a management team to influence rather than a financial-based measure.
Rather than return on a stock price, industrial manufacturers hold management accountable for a return on the balance sheet, often in the form of return on invested capital (ROIC). Industrial manufacturers typically require heavy investments and annual capital expenditures required to maintain them, making return on that invested capital king in the industry (Figure 4).
While market data is always an interesting input to executive compensation incentive design, we find an organization’s program should best fit the specific organization. And, in answering the question, “What should we measure in our incentive plans?”, we advise clients to also take an inward look at their own strategy and establish an incentive program that reinforces and rewards execution of the strategy.
When boards, management and investors fully embrace the business strategy, there can be ample rewards for all stakeholders. In the industrial manufacturing industry, this often can mean measurement of returns on capital rather than returns on a stock price relative to peers.
