A Sudden Swoon for Executive Comp - - CFO.com

A Sudden Swoon for Executive Comp - - CFO.com

A Sudden Swoon for Executive Comp
Salary freezes and reduced incentive-grant values are sweeping the corporate landscape, a new survey shows.

David McCann - CFO.com US
March 17, 2009

Excerpts:

With the public growing more ornery by the day over the compensation of corporate executives, companies in droves are acting with great speed to add restrictions and limitations to their pay policies, according to a new Watson Wyatt survey.

As portrayed by the research results, the changes are sudden and dramatic. In a similar study done just three months ago, 21 percent of responding companies said that they had frozen executive salaries. In the new survey of 145 companies, performed the first week of March, that number soared to 55 percent.

In fact, 10 percent said this month that they have actually reduced top managers' pay — while just 2 percent were in that category in December. And an additional 13 percent expect to cut top-management pay this year, or are considering it.

Also startling is that, when asked three months ago whether they expected to freeze executive compensation in the following 12 months, only 20 percent said yes. Yet almost three times that many of the companies surveyed in March have already done so.

Not only is present pay being frozen, but plans for future merit increases are being scaled back. That was the case for 48 percent of the surveyed companies, compared with 30 percent three months ago.

To most top executives, of greater import than salary limitations are changes to incentive compensation plans, especially long-term incentives, which constitute a majority of their income. A third of the respondents said they expected the dollar value of long-term incentive grants to be lower this year than in 2008, compared to only 4 percent who anticipated an increase. The average decrease was expected to be 35 percent. These numbers are not very speculative, since most companies have decided on 2009 pay packages by now.

Only 12 percent of respondents have reduced eligibility or participation in long-term incentive plans, and 11 percent have decreased the maximum award opportunity, but both numbers were three or four times higher this month than in December.

As for annual incentives, the proportion of companies reducing target bonus opportunities and plan eligibility more than doubled, to 9 percent and 7 percent, respectively.
Also increasingly in vogue are clawback policies that seek to recoup compensation paid to poorly performing executives. Almost a quarter of the surveyed companies (23 percent) have implemented such provisions, up from 13 percent in December.

Despite the new proclivity for reigning in top management's pay, going forward there will be fewer of these changes — at least if you take companies at their word about their future plans. For example, only a small fraction said they expect to freeze salaries in the next year, suggesting that most of the ones inclined to do so have already put the new policy in place.

Read full article and survey tabulations: http://www.cfo.com/article.cfm/13313661/c_13314332?f=home_todayinfinance
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This posting was made my Jim Jacobs, President & CEO of Jacobs Executive Advisors. Jim also serves as Leader of Jacobs Advisors' Insurance Practice.