Economy Impacting Executive Compensation Programs

Earlier this month, Watson Wyatt surveyed 145 large U.S. based organizations to determine the effect that the economy is having on their executive pay programs, a repeat of a similar study done last December in order to examine trends over recent months.  Survey results suggest that companies - at least the large ones represented here - are making some pretty dramatic changes to their programs.

Some key findings from the study:

Base Salaries

• 55% of respondents have frozen executive salaries (up from 21% in December).

• 20% have reduced, or are considering reducing, executive salaries (up from 8% in December).

Annual Incentives

• 38% are making changes to their annual incentive plan performance measures (up from 29% in December).

Long Term Incentives

• 30% are making changes to their long-term incentive plan performance measures (up from 21% in December).

• 36% have changed or plan to change the type of LTI vehicle used.  Of these, 43% are putting more emphasis on time-vested restricted stock and 32% are putting more emphasis on performance-based shares.

• 33% expect to reduce their LTI dollar grant values compared to the prior year (up from 23% in December).

• 42% expect to grant more shares compared to the prior year.

• Most companies are managing with the shares they already have; 59% do not plan to request additional shares earlier than expected.

• Only 1% have taken action on their underwater stock options, but 17% are considering action in the next 12 months.

The Issue of Excessive Risk

• Only 9% have made changes to their executive compensation program to address the issue of "excessive risk", with another 3% planning to do this in the next 12 months.

Comments

[Joe Rice]

So if you are not one of the companies cutting back, this begs the question if it matters in your organization--i.e., does the trend impact decisions? If the company is healthy, I doubt there be cutbacks. But, if the trend was upward, I bet companies would make the argument to follow the trend up. Just my cynical thoughts.

[Ann Bares]

Joe:

They're good thoughts. First of all (and I may not have called enough attention to this in the post) remember that these are large and likely public companies. Whether these same facts and trends apply below the "Fortune 500" and into private company ranks is a question - at least for me. And I do worry about the "monkey see monkey do" aspect of all of this - that companies who are healthy and doing OK will use data like this to justify their own cutbacks. Makes me even the smallest bit hesitant to report this info - except that I get so many requests for information and research that I feel it is important to share what I can.

[Joe Rice]

I would have to defer to you on this based on experience and companies actually asking for you advice. I was thinking about trending data for market pricings and how for the rank-an-file employees, it seems employers are more likely to ride trends down than try to keep up with the trends on the way up--regardless of the health of the company.