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Uncertainty Weighs On Executive Pay Outlook

Base-pay increase projections for 2023 are above historical levels

Three business people sitting at a meeting table.

Economic uncertainty amid continuing labor shortages is affecting employers' decisions about executive pay, new research shows.

According to newly released data from executive compensation consultancy Pearl Meyer, based near Boston, more than one-third of responding organizations gave their executives higher-than-normal merit increases this year, and almost 20 percent made off-cycle salary adjustments.

The survey was conducted between August and September 2022 among more than 300 U.S. board directors, C-suite leaders and senior HR practitioners.

About 20 percent of respondents recently increased short-term incentives (STI) and long-term incentive (LTI) award opportunities for executives, along with a rise in the number of employees eligible to participate in long-term programs.

An Uncertain Environment

"General economic uncertainty, inflation and a tight labor market are weighing most heavily on management teams and boards of directors," said Bill Reilly, managing director at Pearl Meyer and lead sponsor of the survey. "While slightly more than half of our respondents are expecting year-over-year improvements in financial performance, they are clearly uneasy about what 2023 has in store, economically and talent-wise."

Targeted Executive Pay Positioning

The chart below shows pay raise targets among all respondents. Approximately half of respondents target executive compensation at the market 50th percentile, with prevalence higher for base salary than variable pay (STI and LTI).

Pay Component                             Targeted Pay Positioning (% of Respondents)

 Below 50th PercentileAt 50th PercentileAbove 50th Percentile
Base salary12%55%27%
Short-term incentives9%24%29%
Long-term incentives5%40%33%
Total direct compensation7%45%37%

Source: Looking Ahead to Executive Pay Practices in 2023, Pearl Myer, 2022.

Public company respondents and those in the largest size category (revenues or assets above $10 billion) were more likely to target executive pay at the 50th percentile (or median) compared with private organizations, reflecting the impact of greater external scrutiny.

Slightly more than 40 percent of private and not-for-profit respondents (versus 32 percent of public companies) target total direct compensation above the 50th percentile, typically doing so between the 50th and 75th percentile, the survey showed.

Outlook for 2023

Similar to 2022, salary increase projections for 2023 are above historical levels, with values across all employee categories equal to 4 percent at the 50th percentile and 5 percent at the 75th percentile.

Employee Category Average % 50th Percentile %75th Percentile %
CEO direct reports3.9%4.0%5.0%
Other employees4.2%4.0%5.0%

Source: Looking Ahead to Executive Pay Practices in 2023, Pearl Myer, 2022.

Among other findings, 15 to 20 percent of respondents recently increased or plan to increase competitive positioning versus the market for one or more executive pay components (such as base salary, cash bonus and equity-based incentives.)

Among those that grant LTI awards to executives, 67 percent expect to provide similar grant-date values for 2023 as compared to 2022, and 20 percent are forecasting higher values.

"The labor market is showing surprising job growth numbers one month and massive layoffs the following month," Reilly said. In light of this uncertainty, he advised employers to take account of their unique circumstances, as "ultimately, making compensation decisions based on your business goals, and talent management strategy is the right approach."

Negative 'Say on Pay' Shareholder Votes Reach All-Time High

The Fall 2022 corporate-shareholder proxy voting season reached record territory for nonbinding "say on pay" (SoP) votes rejecting executive compensation packages, according to an analysis by consultancy WTW.

As of Sept. 30, there were 78 negative SoP votes among the "Russell 3000" largest U.S. public companies, seven more than the previous highest number of failures (71 negative shareholder votes in 2021).

In January 2011, the U.S. Securities and Exchange Commission (SEC) adopted a final rule implementing the SoP voting provisions mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The SEC regulations require public companies that are subject to proxy rules to provide shareholders with an advisory vote on the compensation of the most highly compensated executives. SoP votes must be held at least once every three years.

In 2012, only 2.6 percent of companies that voted on SoP measures failed to pass them. This year, the overall rate of SoP proposals failing to receive majority support increased to 4 percent, and the average level of shareholder support has dipped below 90 percent for the first time in 10 years.

"Proxy advisors and institutional investors have tightened pay scrutiny," WTW reported. "A primary issue at companies with a negative SoP recommendation and a high pay-for-performance concern is the lack of performance-based attributes for most long-term incentives. … This is particularly true when we've seen examples of special retention awards, which have been heavily scrutinized absent a strong performance-based structure."

Financial Services Firms Take a Hit

According to another recent report, by Johnson Associates Inc., a New York-based compensation consulting firm, year-end incentive payments are expected to drop sharply across the financial services industry in the wake of declining revenue and weakening economic conditions.

The analysts estimate that overall year-end incentives for the financial services sector, including cash bonuses and equity awards, will be significantly lower compared with last year.

"Most Wall Street professionals will be quite disappointed and surprised when they receive their year-end bonuses," said Alan Johnson, managing director of Johnson Associates. "Just one year removed from record profits and bonuses, firms tightened their belts on compensation as revenue declined … and economic headwinds showed no signs of abating."

According to the analysis, bonuses for management positions in the investment banking sector are projected to decline 25 percent to 30 percent.

"Unfortunately, for financial services, current projections anticipate challenging business conditions, inflation and economic uncertainty to continue into 2023," Johnson said, and "the residual 'war for talent' mantra is broadly waning."

Given these dynamics, "2022 compensation decisions should be strategic and mindful … when sizing awards and establishing budgets, headcount and retention needs," he advised.

Related SHRM Article:

SEC Adopts Compensation Clawback Rule with Requirements for Public Companies, SHRM Online, November 2022


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