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March 31, 2010
2010 Executive Pay Forecast Calls for Change
In a new report, Mercer predicts some change in the executive compensation landscape as the economy begins to recover. Companies continue to struggle with reduced staffing levels, and are attempting to balance compensation programs during a time when forecasting is difficult, according to the report.

Also impacting companies as they move through 2010 is concern about their ability to keep their executive teams and other critical talent, as competitors attempt to poach them away.

Many companies have been forced to reduce headcounts as they have dealt with the tough economy. Those attempting to streamline without eliminating jobs have often turned to pay freezes or reductions, and for many companies, that policy has extended into the level of executive management.

But, according to Mercer’s Executive Remuneration Perspective, Insights for 2010 report, 2010 won’t be a replay of 2009, at least as far as executive salary is concerned. Most (65 percent) report they will increase executive pay for 2010, with an additional 11 percent planning to at least restore pay reductions made during the prior year. Mercer expects an average of 2.8 percent increases for executives.

Executive incentive programs are expected to retain their award levels, according to the report. However, because of the difficulty involved in setting appropriate measures toward reaching those payouts, many companies expect that the actual payouts from the incentive plans will be lower than the targets, or nonexistent, for 2009 performance. The challenge is to set expectations that are both realistic and inspiring for executives, says the report.

Mercer expects a lot of discussion around a few issues this year, among them, ‘say on pay.’ Say on pay is a nonbinding vote on executive pay conducted by corporate shareholders. Just 19 percent of companies have adopted or are considering adopting say on pay for 2010, Mercer says, although the global consulting firm believes that percentage will increase later in the year as executive pay discussions begin a new cycle.

Another issue Mercer expects to hear about is risk in incentive plans. More than one-in-three (36 percent) of the surveyed companies reported that they had completed or plan to complete an assessment of incentive plan risks in the current year.

One strategy to combat excessive risk-taking is a requirement to pay all or part of annual incentives in company stock that vest over a period of time. This strategy does not seem to be popular, in spite of the discussions. Just 4 percent of respondents indicated they adopted or are considering this approach.

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