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As large U.S. companies finalize their decisions about incentive payouts for 2008 and equity awards for 2009, they are giving significant weight to examining their year-end results and the current economy, according to a Mercer survey on annual and long-term incentives.
The survey report, Weathering the Storm in 2009, includes responses from nearly 200 U.S. organizations that have a median annual revenue of $2.9 billion. The majority of participating companies were still finalizing their decisions at the time the survey was fielded, but of those that had made early decisions by December 2008, approximately one-fifth are making changes to prior practices.
“Most companies will finalize their plans in early 2009, assessing how to respond to the volatile economic environment on a ‘just-in-time’ basis,” says Bruce Greenblatt, a principal in Mercer’s executive remuneration consulting business. “We expect the decisions of our survey’s early deciders to be a bellwether of how things will play out.”
A theme observed among many of those who have made early decisions is an anticipated reduction in long-term values for 2009. Other trends include:
“The early deciders are telling us that 2009 may be a game-changer for long-term incentive granting practices. Many companies are anticipating long-term incentive values that are lower than 2008 levels, perhaps a cut by 10 to 30 percent,” says Greenblatt.
---------------------------------------------Many anticipate long-term incentive valuescut by 10% to 30% from 2008 levels.---------------------------------------------
“Furthermore, while the number of shares granted may be flat or increase, the value delivered in 2009 will be lower than 2008 at many companies given current stock price levels,” he explains.
Long-Term Incentive Programs
Annual Incentive Programs
According to Mercer’s survey, the impact of the economy on company performance is reducing annual incentive payouts for 2008 performance. Nearly two-thirds (64 percent) of companies are expecting below-target annual incentive payouts.
However, 29 percent are considering some form of a discretionary award to select employees or all eligible participants—illustrating that companies recognize top talent have choices and needs to be appropriately rewarded for their contributions even in a difficult economic environment.
“With market tumult comes opportunity,” says Greenblatt. “Companies in this game-changing environment have a unique opportunity to determine how best to configure their executive rewards and talent management strategies to align with key business objectives.”
Action Steps: Revising Long-Term Incentives
Mercer recommends that companies evaluate a range of factors to determine how best to revise their long-term incentives (LTI) programs for 2009, including:
Stephen Milleris an online editor/manager for SHRM.
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