Executive Comp Plans Target Stronger Performance Ties

Organizations split between one- and three-year 'say-on-pay' frequency

By Stephen Miller Jan 21, 2011

In response to the legislative and regulatory demands regarding executive compensation, organizations are focusing efforts on measuring performance and aligning it with pay. Nearly two-thirds of U.S. and Canadian companies are introducing new financial performance measures in their annual incentive programs, according to a new survey by Mercer, an HR consultancy.

Mercer’s Executive Compensation and Performance 2011 survey, conducted in November 2010, examines how organizations are designing short- and long-term incentives and addressing the new legislation regarding say-on-pay. It includes responses from more than 260 employers across the two countries.

According to Mercer’s survey, respondents:

Introduced in 2010 or plan to add or alter in 2011 new financial performance measures in their annual incentive programs (65 percent of organizations).

Introduced in 2010 or plan to add or alter in 2011 new nonfinancial metrics in their annual incentive plans (50 percent).

Changes to Annual Incentive Programs

Made in 2010

Making, Altering or Considering for 2011

No Change Planned

Introduce financial measures




Introduce nonfinancial measures




Allow for increased discretion relative to payouts




Increase range of performance for corresponding payout levels




Increase maximum payout opportunity




Source: Mercer (figures are rounded).

“As companies look for the right metrics to measure performance and align it with pay, they are taking a broader view of performance and success beyond hard financial numbers,” said Josh Wilson, a partner with Mercer’s rewards consulting business. “This is fitting, since many companies are still being cautious about making significant changes to their executive compensation programs despite the improving economy.”

Reinforcing this notion of uncertainty that many organizations are facing, the survey found that:

More than 35 percent of companies will use some level of discretion to determine funding for 2010 incentive payouts.

13 percent will likely see increased discretion regarding the level of incentive payouts in 2011 and beyond.

“Companies realize that they want the freedom to reward strong performance and that it may be hard to identify before the plan year what will be critical to the company’s success,” Wilson explained.

Annual incentive payouts for 2010 reflect an improving economy, according to the survey, which found that:

Nearly 60 percent of companies expect 2010 annual incentive plans to pay out at or above target levels.

Only 7 percent report that they will not pay out anything for the 2010 plan year.

Long-Term Incentives

Long-term incentive (LTI) grant levels continue to show signs of stabilization. Mercer’s survey shows that:

More than two-thirds (68 percent) of organizations made LTI grants in 2010 that were consistent with the value of target levels set in 2009.

More than 50 percent plan to maintain 2011 LTI grant values relative to 2010.

Just more than one-quarter (26 percent) were still finalizing their plans to adjust 2011 LTI grant levels.

The pace of change in LTI programs appears to be stabilizing as well. Nearly two-thirds of organizations made at least one change to their LTI programs in 2009, while only about one-quarter expected changes for 2010 and 2011.

“The changes made a few years ago were in response to the equity market downturn and the declining economy,” Wilson said. “Today, companies are seeking more stability in their LTI programs.”

In response to scrutiny by governance advocates, regulators and legislators, companies are “de-risking” their LTI programs and enhancing pay-for-performance relationships. For executives and non-executives, the most common changes by organizations to LTI programs for 2011 are a decrease in the use of stock options and an increase in the use of service-based or performance-based restricted stock shares or restricted stock units ("units" are converted into stock shares once the individual meets specified service or performance goals).

In addition, organizations are considering increasing the use of performance to differentiate grant sizes.

'Say-on-Pay' Vote Frequency

According to Mercer’s survey, U.S. companies are continuing to take a wait-and-see approach regarding disclosure changes attributable to the say-on-pay provision in response to the Dodd-Frank Act. Approximately half of the respondents were uncertain as to whether they will make any disclosure changes as a result of the say-on-pay rules, while most of the remaining companies planned to make minimal changes.

Moreover, companies are split on how frequently they expect their programs to be put to a say-on-pay shareholder vote. While 50 percent are expecting to hold annual say-on-pay votes, 42 percent expect to hold the vote every three years and 8 percent are expecting biannual votes.

Another View

A mid-December 2010 Towers Watson survey of publicly traded U.S. companies found that:

51 percent expect to hold annualsay-on-pay votes.
39 percent prefer the vote be held every three years.
10 percent expect to hold votes every two years.

(See the SHRM Online article "U.S. Companies Divided onSay-on-Pay Frequency.")

While many governance watchdog groups advocate an annual say-on-pay vote in order to strengthen shareholder accountability, "the philosophy of instilling a long-term performance focus for executives supports a less frequent say on pay,” Wilson contended. “This allows reward plans appropriate time to play out before having shareholders weigh in."

Microsoft Corp. has announced that it will hold a say-on-pay vote every three years, as the law allows, to encourage long-term pay practices and discourage short-term thinking based on short-term stock moves.

Stephen Miller is an online editor/manager for SHRM.

Related Articles:

U.S. Companies Divided onSay-on-Pay Frequency, SHRM Online Compensation Discipline, January 2011

Keys to Effective Pay for PerformanceSHRM Online Compensation Discipline, December 2010

Directors Looking Beyond Dodd-Frank Act to Fix CEO Pay, SHRM Online Compensation Discipline, November 2010

Fewer U.S. Companies Offered Executive Perks in 2010, SHRM Online Compensation Discipline, October 2010

Quick Links:

SHRM Online Compensation Discipline

SHRM Salary Survey Directory

SHRM Compensation Data Center

SHRM Metro Economic Outlook reports

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