Top Executives Earn Performance Bonuses Despite ‘Tepid Growth’

Trump administration’s fiscal policies could affect incentive payouts

Stephen Miller, CEBS By Stephen Miller, CEBS January 4, 2017

Despite lackluster progress for the U.S. economy overall, a strong third quarter helped boost annual variable pay incentive bonuses for U.S. corporate executives. The payouts typically are made near the start of the new year based on the past year's performance.

A poll conducted in December by consultancy Willis Towers Watson, with responses from 260 corporate executives and compensation professionals, found that:

  • More than one-third of the companies polled (36 percent) expect to pay annual bonuses that exceed 110 percent of target.
  • Roughly the same number (35 percent) anticipate paying bonuses at 90 percent of target or below.
  • The remainder (29 percent) expect to pay annual incentives close to target.

"We were somewhat surprised that so many companies expect to pay bonuses well above target for 2016 performance, given the relatively tepid growth in revenue and earnings in many industries this year," said Chicago-based Andrew Goldstein, leader of the consultancy's North American executive compensation practice. "While the stock market, and thus shareholder returns, surged late in the year, the underlying corporate financial performance for much of 2016 was mediocre overall, which might have suggested a continuation of the downward trend in bonus payouts that we saw in 2015. But without question, third quarter financial results improved, so the strength of the fourth quarter could alter the balance."

Positive Views of 'Say on Pay'

Overall, nearly half of the respondents (47 percent) said the impact of mandatory but nonbinding say-on-pay shareholder voting has been very positive or generally positive. Only one in 10 said the voting, required by the Dodd-Frank Act, has had a negative impact, and just 4 percent favor repealing the say on pay measure.

"It will be interesting to see how corporate America responds if the Trump administration moves to repeal Dodd-Frank outright," said Goldstein. "Our findings suggest that most companies are fairly comfortable with say on pay, in part because institutional investors and proxy advisors would be more likely to oppose the re-election of compensation committee members or other directors in the absence of the say-on-pay vote."

While the fate of other Dodd-Frank rules, such as the CEO pay ratio disclosure, is clearly up in the air, he noted, "It is quite possible that many companies would continue conducting say-on-pay votes voluntarily even if the Dodd-Frank requirement is repealed."

[SHRM members-only toolkit: Designing Executive Compensation Plans]

Clawback Policies Established

The poll found a large majority of respondents (83 percent) currently have some type of clawback policy in place that requires an executive who received performance-based bonuses to return those awards in the event that fraud or misconduct is revealed, or if financial statements are revised downward. While most of the polled companies said they were unlikely to expand their policy, roughly 10 percent said they were likely to consider doing so to cover situations that result in significant financial or reputational harm.

"Recent company situations have forced many boards of directors to consider 'What if that happened here?' scenarios," said Goldstein. He advised companies to:

  • Carefully review their clawback policies to ensure they're broad enough to permit a clawback for circumstances that result in significant financial or reputational harm to the company.

  • Consider how shareholders might react if they weren't empowered to use their discretion to hold back or recoup incentive compensation in these situations.

Trump's Fiscal Policies and Incentive Plans

The Trump administration's fiscal and monetary policy could affect executive compensation programs, particularly long-term incentive plans, said Harry J. Schum, a senior consultant with Compensation Resources Inc. in Upper Saddle River, N.J.

"While the details will take a while to take shape, the [Trump administration's stated] intention is to lower tax rates, both corporate and individual. Other actions could raise interest rates, affect the exchange rate, and others," Schum noted.

"Since a good portion of executive programs are tied to bottom-line results, these governmental actions could result in dramatically different near-term income statement projections, with a result of much higher incentive payments or post-tax value propositions than the original intent of the plans," he explained.

Companies that have long-term plans with bottom-line performance measures—such as net income or total shareholder return—"might want to do some assessing how their plans could be affected and, more importantly, make certain the plan documents permit a change to these measures for future plan grants," Schum advised.

Related SHRM Online Articles:

When Bonus Incentives Go Bad—and How to Prevent It, SHRM Online Compensation, January 2017

Bonus Binge: Variable Pay Outpaces Salary, SHRM Online Compensation, August 2016

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