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On Tap for Executives: Salary Freezes, Bonus Cuts, Reduced Stock Awards
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In a major shift since last fall, companies are moving more aggressively to freeze executive salaries and to significantly reduce bonuses and stock-based awards, according to a survey completed last week by independent compensation consultancy Pearl Meyer & Partners.
The latest results from the Executive Pay in the New Economy online survey series reveal growing recognition that market turmoil, the potential for government intervention, and the public’s heightened sensitivity to executive pay will significantly affect programs going forward. The 436 board members, executives and human resources professionals who participated in the survey expressed a more negative outlook for executive pay than respondents to a similar survey conducted by the firm last November.
“It is difficult for companies to justify executive salary increases when growing numbers of employees face layoffs and more firms are struggling just to survive,” said David N. Swinford, president and CEO of Pearl Meyer & Partners. Companies are also eyeing executive pay restrictions imposed by Treasury on companies that have taken federal TARP funds. “The survey shows that increasingly, Boards and management are moving to reexamine executive pay design even in industries not directly affected by these restrictions,” said Swinford.
Fully 90% of survey respondents in February said the troubled economy will color their compensation decisions over the next six months. “That suggests that in contrast with the sustained economic and executive pay growth of the previous decade, many Boards realize they will have to better manage executives’ expectations about their likely career earnings,” Swinford said.
Bonus payouts below formula
By way of example, Swinford said that while bonuses normally decline when performance targets are missed, more companies plan to exercise negative discretion and cut incentive payouts more deeply than prescribed by the performance plan formula. About one in four survey respondents expect to pay no year-end bonuses for 2008, while 42% are considering paying a bonus below formula – that is, an amount less than what the executive “earned” based on the plan’s stated performance objectives for 2008. “Clearly, many companies see a disconnect in their goal-setting process that warrants overriding the plan in this exceptional year, so that awards reflect real market performance,” said Swinford.
Base salary freezes common
Half of respondents – nearly three times as many as in the November survey – said their companies have implemented or are “strongly considering” imposing an executive salary freeze. Even among those that expect to provide raises, expectations are modest: fewer than 6% of respondents expect to boost salaries more than 5%.
Stock award values drop
Boards also are less willing to cushion executives from plummeting market prices. Nearly 60% of respondents anticipate a reduction in 2009 long-term incentive awards – the stock option and restricted stock grants that comprise the bulk of executive compensation in many industries. Of those, half predict values will be “considerably lower.” Said Swinford, “Boards are rejecting the argument that larger grants are needed in 2009 to replace the retention ‘glue’ provided by past stock awards that have lost enormous value in the market downturn.”
Notably, while Board members in last November’s survey tended to be more aggressive on the prospects for changes in executive pay programs than other respondents, the February results show Directors and executives to be generally like-minded. “It is difficult to fix a problem until both parties acknowledge that something is wrong,” commented Swinford. “This suggests a positive coming together of minds on the need for significant change.”
About the survey
Pearl Meyer & Partners’ Executive Pay in the New Economy surveys in February 2009 and November 2008 examined the changing executive pay outlook among boards, executives, and human resource professionals across a broad range of industries, organization sizes and ownership structures. A total of 436 respondents participated in the February 6 survey, including 108 “outside directors” and 328 “employees of the firm.” The November survey had 410 participants, including 80 “outside directors” and 330 “employees of the firm.”
For 20 years, Pearl Meyer & Partners (www.pearlmeyer.com) has served as a trusted independent advisor to Boards and their senior management in the areas of compensation governance, strategy and program design. The firm provides comprehensive solutions to complex compensation challenges for companies ranging from the Fortune 500 to not-for-profits as well as emerging high-growth companies. These organizations rely on Pearl Meyer & Partners to develop programs that align rewards with long-term business goals to create value for all stakeholders: shareholders, executives, and employees. The firm maintains offices in New York, Atlanta, Boston, Charlotte, Chicago, Houston and Los Angeles.
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