Outside Directors Say Executive Pay Programs Need to Change

Directors confront challenges against the backdrop of a tough economy

By Stephen Miller May 11, 2009

A majority of directors who serve on corporate boards believe that the executive pay programs of U.S. companies need to change as a result of the financial crisis, according to a survey by consultancy Watson Wyatt. Among the findings:

Nearly two-thirds (63 percent) of outside directors believe American companies should modify their executive compensation programs to adapt to new economic realities.

Most directors (68 percent) are not concerned, or only slightly to moderately concerned, about the retention of high-performing executives.

Reinforcing this point, 70 percent of directors expect executive pay opportunity to decline over the next two years.

Watson Wyatt’s survey was conducted in March and April 2009 and includes responses from 85 outside directors.

Pay Shaved

According to the survey report, Effect of the Economy on Executive Compensation Programs: The Board View, more than a third (34 percent) of directors said their companies had already reduced salary, target bonus and/or long-term incentive award levels. Moreover, 6 percent plan to make those changes in the next six months, and another 48 percent are considering making them. These pay changes will not be temporary for a significant number of companies. And, although underwater stock options are at historically high levels, 58 percent of respondents whose companies grant options do not think it is appropriate to take action such as repricing or exchanging them for new shares.

Shareholder Scrutiny

“Shareholders and the general public will support that directors are looking to change their executive pay programs to reflect the economic crisis,” says Ira Kay, global director of executive compensation consulting at Watson Wyatt. “We are confident that boards will continue to hold management directly accountable for their company’s performance.”

“Directors face an increasingly difficult challenge against the backdrop of a very tough economy and intense outside scrutiny,” adds Andrew Goldstein, North American co-leader of executive compensation consulting at Watson Wyatt. “For incentive pay programs to be effective, they must be motivational and reward executives well for delivering strong performances. At the same time, compensation programs must satisfy shareholders by safeguarding against misaligned incentives, pay for failure and excessive risk taking. The onus is on directors and management to achieve that balance.”

Additional Highlights

Among other key survey findings:

Almost half (49 percent) of directors noted their companies have already made or are planning to make changes to their long-term incentive (LTI) plan vehicles. Among these companies, 53 percent plan to put more emphasis on performance-based shares, and 26 percent plan to put more emphasis on performance-based cash plans.

30 percent of directors expect companies to change their performance metrics around annual bonuses in fiscal year 2009, and 27 percent expect to change their performance metrics around long-term performance plans.

Finally, a majority of directors are doubtful that proposed legislation, including giving shareholders a "say on pay" or limiting "golden parachute" severance, would have a significant impact on improving executive pay for performance.

Stephen Miller is an online editor/manager for SHRM.​

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