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March 17, 2003
Executive Compensation Plans Reviewed, Adjusted
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.

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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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