While the difficult economy and companies' poor financial performance are taking
a toll on executive pay, many companies are using this time to consider changes
to executive long-term incentive compensation policies and practices, given
current economic, regulatory and governance trends, according to Hewitt Associates,
a human-resources and consulting firm.
Hewitt recently surveyed 178 major U.S. companies and found that two-thirds
of the companies indicate they are either taking action or considering changes
to their long-term incentive plans. Of these, 30 percent are restricting or
planning to restrict eligibility for stock options at lower levels, 27 percent
are looking to convert or have converted pay from stock options to "full
value" share plans (e.g., restricted stock or performance shares), and
26 percent deliver or are planning to deliver lower compensation in long-term
incentives. Also, almost 50 percent of companies expect significant challenges
in communicating these program changes to participants.
As for current compensation, executives are seeing an impact with two-thirds
of companies granting executives merit increases of less than 4.0 percent this
year, including 9 percent that are not awarding an increase based on merit at
all.
At the same time, executive bonus payouts in 2003 (for 2002 performance), although
consistent with last year's levels, are well below historical norms, according
to the firm. Fifty-two percent of companies anticipate bonus payouts will be
at or less than 90 percent of target in 2003, with approximately one-third expecting
bonuses to be less than 70 percent of target.
"In looking at bonus payouts versus targets, it is clear that companies
were anticipating an economic recovery in 2002 when they established the performance
criteria for these bonuses," says Tracy Davis, senior consultant with Hewitt
Associates. "However, since a recovery hasn't happened, it's more critical
than ever that companies understand the importance of differentiating pay for
the top-performing executives who truly are helping lead the company in these
uncertain times."
In terms of long-term incentive compensation, only 17 percent of companies
surveyed indicate they will grant a larger stock option award size in 2003,
compared with 2002. More specifically, nearly 40 percent of large market cap
companies anticipate granting between 90 percent and 100 percent of last year's
stock option award size, 17 percent said the award will be between 70 percent
and 90 percent, and 13 percent indicated that their 2003 award grant will be
less than 70 percent of the 2002 award size.
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