Compensation for executives at large and mid-size U.S. companies is expected to rebound modestly in 2010 following two consecutive years of pay declines, according to a survey by consultancy Towers Watson. Additionally, most companies are planning to fine-tune their executive pay programs to further tighten the link between pay and performance as well as address a growing concern over executive retention.
Towers Watson fielded the survey in June 2010, targeting publicly traded and privately held corporations in the United States representing a cross section of industries. Among the key findings:
• Nearly half (49 percent) of the respondents expected to increase funding for annual bonuses for executives in 2010.
• One-third (33 percent) had made or expected to make larger long-term incentive grants (dollar-wise) in 2010 vs. 2009.
However, the survey results suggest that most companies remain cautious about spending:
• Most (53 percent) of the companies increasing bonus funding were projecting relatively modest increases of 20 percent or less.
• More than two-thirds (69 percent) of those making larger long-term incentive grants said the dollar value of their grants would increase by 20 percent or less.
“For many companies, the economic recovery brings improved financial performance and greater flexibility to pay larger annual bonuses and long-term incentives grants,” said Doug Friske, head of executive compensation consulting at Towers Watson. “However, the survey findings also reflect the unevenness of the recovery and underscore the fact that many companies continue to struggle to regain momentum in a challenging environment.”
Incentive Programs Tweaked
The survey found that companies plan to fine-tune their executive pay programs, and particularly their incentive plans, in the wake of continuing pressure to better align their programs with business performance:
• Nearly two-thirds of respondents (66 percent) reported making some change to their annual incentive programs in 2010.
• Just over one-half (54 percent) made or expected to make revisions to their long-term incentive plans.
The most common revisions made to incentive plans were to change performance metrics or increase performance goals. Additionally, the most common shift among performance metrics was to place greater emphasis on profit measures and revenue growth.
“Clearly, most companies are taking a thoughtful and cautious approach rather than making wholesale changes to their executive pay programs,” said Andy Goldstein, leader of Towers Watson’s executive compensation practice in the central region of the U.S. “In fact, most of the changes we are seeing are consistent with compensation committees’ continuing focus on pay for performance as well as on mitigating compensation risk and their growing need to exercise greater discretion to ensure appropriate pay results.”
Executive Retention Concerns
The survey confirms that companies are paying more attention to executive retention issues during the economic recovery. In fact, only one in 10 respondents said that executive retention was not an issue for their company. That's one reason why despite shareholder pressure:
• Relatively few companies are making significant changes to retention-focused executive pay elements including employment agreements, golden parachutes and supplemental executive retirement plans.
• Still, about one in three respondents (37 percent) had eliminated or reduced highly visible executive perquisites in the previous two years, continuing an ongoing trend of companies rationalizing compensation not directly linked to performance.
• Nearly two-thirds (63 percent) of companies that reduced perks in the previous two years did not replace the lost value to executives, reflecting overall negative sentiment toward perks and the pressure to reduce costs during a time of weakened profits.
“Most corporate executives took a financial hit in both 2008 and 2009, but with the economy and labor markets showing signs of improving, companies are now facing another challenge—holding onto talented executives,” said Goldstein. “As a result, companies will continue to adjust their pay programs to not only address executive retention but also to further strengthen the link between executive pay and performance.”
Stephen Miller is an online editor/manager for SHRM.
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