Producer spotlight
Top 10 ways executive compensation is changing
A struggling economy and debate over pay limits for senior execs whose companies received funds from the federal Troubled Asset Relief Program (TARP) have put exec compensation under intense scrutiny – again. This time around, consultants believe some changes may stick.
The trend in executive compensation toward greater emphasis on long-term growth and performance-based plans was already underway before the recession began. Corporate directors and HR comp specialists believe the current crisis in confidence with regard to executive pay presents an opportunity to re-examine executive compensation from top to bottom. The challenge: how to realign executive compensation plans to attract top talent and incent strong performance while avoiding public uproar or counter-productive legislation.
Here are 10 changes experts anticipate:
| 1. | Flat or declining salaries. Since 2008, the average base pay for CEOs and COOs in the U.S. has decreased by 9.3 and 11 percent, respectively.1 |
| 2. | Smaller or delayed long term incentives and bonuses. The bulk of cuts will be in long-term incentives. Awarding more stock when stock prices are falling only dilutes the number of company shares. Paying out more cash doesn’t work if the company is cash poor. Plans that withhold payment for longer periods – four or five years – are also gaining traction. |
| 3. | Evolving performance criteria. Metrics for awarding incentives and bonuses are moving beyond share values to earnings, cash flow, receivables control or other internal measures. |
| 4. | Sustainability measures. A focus on the sustainability of positive corporate financial performance and financial risk mitigation is being factored into executive incentive compensation formulas. |
| 5. | Fewer perks. Executive perks, typically only 1-2 percent of top officers’ total compensation to begin with, are expected to shrink still further. Potentially on the chopping block: “luxury” benefits such as corporate jets, country club memberships and executive medical plans. |
| 6. | "Clawback" clauses. While bonus "clawback" provisions – where a company reclaims performance-based bonuses if it determines the “performance” wasn’t real – are not new, they are likely to become far more prevalent in the TARP era. |
| 7. | Reasonable retirement pay. More than half (52 percent) of corporate directors surveyed by USC Marshall School of Business say retirement packages should decrease. In the 2006 survey, only 25 percent held that opinion.2 |
| 8. | Sensible severance. Executive severance payments are now banned for companies receiving TARP money. Other companies aren’t likely to do away with severance provisions altogether, but many may trim them back or phase them out over a high-performing executive’s tenure. |
| 9. | "Say on pay." Likely to become a best practice, "say on pay" requires shareholders to vote annually thumbs up or thumbs down on the company’s entire executive compensation program. The vote is non-binding, but overruling a “no confidence” vote by shareholders could be a PR nightmare. |
| 10. | Better communication of executive compensation policies. As the recent backlash against Wall Street points out, it’s no longer good enough to develop sound executive compensation policies. They also must be positively communicated to employees, the public and shareholders. |
1 2010 HR Trendbook, “Executive Pay: Changes Coming”.
2 USC Marshall School of Business survey, August 2009, “Majority of Corporate Directors Believe CEO Pay Packages Need Paring,” reported by CCH® HR Management, September, 2009.
Sources
Employee Benefit News, “Executive Comp,” June, 2009.
Robert Grossman, “Executive Pay: Perception and Reality,” HR Magazine, April 2009.
HR Magazine, “Executive Pay: On Your Radar,” April 2009.
HR Marketer.com, “Executive Pay Decreases in 2009.”
Watson Wyatt survey, “Effect of the Economy on Executive Compensation Programs: The Board View,” 2009.
