Most U.S. companies are not planning to restore executive pay cuts or freezes made during the economic crisis anytime soon, according to a survey by consultancy Watson Wyatt. As they prepare for continuing increased public scrutiny of executive pay, many are avoiding further short-term changes and focusing instead on long-term shifts toward better pay-for-performance and assessing their compensation programs within the context of risk management.
The survey, Executive Pay and the Economic Recovery, was conducted in late September 2009 and includes responses from HR and compensation executives at 187 U.S. companies. Among the findings:
• 63 percent of U.S. companies are not planning to reverse or restore changes made to executive salaries in the next six months.
• Fewer companies are considering short-term changes such as reducing salaries (2 percent were considering it, compared with 10 percent in March 2009).
• A vast majority of employers (92 percent) are not planning to reduce bonus opportunities or eligibility requirements.
However, large numbers of respondents did indicate their intention to make the following changes:
• Three in 10 companies are raising performance goals relative to 2009's actual performance (29 percent), and changing metrics (31 percent) in their annual incentive plans.
• 39 percent have changed or plan to change long-term incentive vehicles. Of these companies, 42 percent plan to put more emphasis on performance-based shares and 25 percent on performance cash plans.
Long-Term Focus
“Companies have moved beyond the short-term frenetic activity that we saw at the beginning of the year,” says Andrew Goldstein, North American co-leader of executive compensation consulting at Watson Wyatt. “Now, companies are looking at how they can best address more long-term concerns with structural changes to pay programs.”
According to the survey, 94 percent of companies expect more scrutiny of executive pay in the next two years as a result of new legislation, Securities and Exchange Commission regulations and public pressures, with almost three-quarters (72 percent) expecting the relationship between pay and performance to improve.
Sixty percent of companies reported having little concern regarding proposed say-on-pay requirements, under which companies would be required to offer shareholders a nonbinding vote on executive compensation packages. The majority of respondents appear to be already taking steps by improving their required compensation discussion and analysis (CD&A) disclosure to explain their pay program rationale and appropriateness to shareholders (70 percent) or identifying potential executive pay issues/concerns in advance (67 percent).
Still, almost half (42 percent) of companies are concerned about potential legislation assessing executive pay for “excessive risk.” Most have taken action to address the issue of risk:
• 54 percent have or plan to add a formal risk assessment process, up from 30 percent in March 2009.
• 50 percent have or plan to certify in the proxy that a risk assessment has been performed, up from 31 percent in March.
“Companies recognize that changes to executive pay programs will be needed to stand up against growing criticism and increased pressure,” says Ira Kay, global director of executive compensation consulting at Watson Wyatt. “However, this change will be a long-term process and one that will require companies to focus on strengthening performance-based incentives, balancing risk and rewards, and meeting proactively with key stakeholders to discuss their pay program rationale.”
Other survey findings include:
• Only 12 percent plan to decrease their next fiscal year’s long-term incentive (LTI) grant dollar value, down from 33 percent in March 2009. Almost half (45 percent) do not expect their LTI grant values to change.
• Companies report moderate-to-significant concern about caps on incentive compensation (53 percent), expanded CD&A disclosures below the top five executives (53 percent) and elimination of the section 162(m) performance award exemption (53 percent).
• 19 percent of companies have eliminated their golden parachute tax gross-up provisions, and 44 percent have or are considering clawback policies.
Stephen Miller is an online editor/manager for SHRM.
Related Article:
Financial Execs Cite Top Cost Concerns, SHRM Online Benefits Discipline, October 2009
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