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Re-evaluating Executive Pay

Caps and Cuts: Here Today, Gone Tomorrow?

Thanks to the recession, shareholders outraged about overpaid executives at underperforming companies might see significant changes in corporate leaders’ pay this year, a recent survey suggests.

In a poll of 145 human resources and executive compensation experts at large companies based in the United States, consulting firm Watson Wyatt Worldwide found that the majority of those companies have recently capped or cut corporate leaders’ pay. Many also are considering changes in performance-based incentives.
The survey, conducted in March, indicated that during the previous three months, 55 percent of the companies had frozen executives’ salaries and 10 percent had reduced them. Thirty-eight percent of those surveyed were making changes to annual incentive-plan measures and 30 percent were altering long-term incentives for top managers.
“The recession has shone a light on executive pay, causing many companies to re-evaluate the long-term implications of their executive pay policies,” says Andrew Goldstein, Watson Wyatt’s co-leader of executive compensation for North America.
Shareholder demands and publicity surrounding the fat salaries of leaders at bailed-out companies might nudge the process along, Goldstein suggests, but he warns that the actions companies have taken so far might not be sufficient. “Although boards are under pressure to make changes,” he says, “it’s still not clear whether the changes (in compensation plans) have been aggressive enough to placate shareholders.”
Nearly half (48 percent) of the survey respondents expected their corporation to reduce bonus-pool funds available to executives this year compared with 2008. Twenty-three percent envisioned no change in the bonus pool, 11 percent said those funds will likely increase and 18 percent didn’t know whether such funds would change. Bonus-pool funds are often tied to performance incentives.
For the 48 percent who predicted a smaller bonus pool, 17.2 percent expected available funds to be cut at least in half, and an equal percentage believed their company wouldn’t pay bonuses at all in 2009. More than a third of respondents (35.9 percent) predicted bonus-pool funds would decrease by 20 percent to 49 percent, and 29.7 percent expected them to shrink between 1 percent and 19 percent.
Twenty-three percent of survey respondents said their company recently added “clawback” policies to executive compensation plans. Such provisions enable a company to recover performance-based compensation from executives because of misconduct or a restatement of financial results.
Executive compensation has been a thorn in shareholders’ sides for years, and that could continue. Recent actions to lower executive pay, the survey suggests, might not be permanent.
Asked to estimate how long top managers’ salaries will be affected by salary freezes or reductions, plus changes in bonus-pool funds and other incentives, 39.5 percent of those surveyed said these forms of compensation likely will be restored later. Nearly one-third (32.6 percent) believed it’s somewhat probable that recent pay reductions will eventually be reinstated, and 27.9 percent believed it’s less likely this will happen.

Kate Fitzgerald is a free-lance writer based in Scottsdale, Ariz., specializing in business and technology.

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