2004 Executive Pay Practices Track 2003 Trends

April 8, 2004 (PLANSPONSOR.com) - For all the attention focused on options expensing and executive compensation policies, the impact on pay practices among large employers looks to be a mixed bag, according to Hewitt Associates.

Nearly half (45%) of the nearly 150 employers surveyed anticipate a 2004 executive stock option award roughly comparable, or perhaps a bit less, than last year, while 27% anticipate one significantly lower – and 28% say it will likely be significantly higher. Change is certainly afoot, with 38% of organizations converting pay from stock options to full-value shares with time-based vesting, and an identical 38% converting options into performance-based shares.

Significantly, 36% of organizations will, or are planning to, restrict eligibility for options at lower levels within the company.

“Level” Paying Field

As for executive base pay and bonuses, Hewitt’s study reveals that both are leveling off after declining in 2002 and 2003. Approximately three-quarters of companies are awarding executive base pay increases of less than 4% (the median is 3.5%). However, the number of firms that did not award base pay increases to executives in 2004 rose to 15% from 9% a year earlier (see Companies Retooling Executive Comp Policies ).

In terms of 2004 bonus payouts, those given for 2003 performance, more than half (53%) of the survey respondents said they will award executive bonuses below target, and nearly half of those at less than half the target. Those results mirror that reported in last year’s survey, where 54% of organizations provided executive bonus payouts below target and 21% were less than one-half of target.

In addition, Hewitt notes that:

  • The median equity-incentive run rate* declined slightly in 2003, with 78% of company respondents anticipating a run rate of 1.5% or lower this year. Run rate, one means of measuring annual stock dilution, is defined as stock options granted each year, divided by common shares and options outstanding, plus remaining shares available to grant. The higher the run rate, the greater the dilution.
  • More than 40% of companies believe that none of their outstanding stock options will expire underwater, while nearly a third anticipate that less than 20% of their options will reach full term underwater, and approximately three in 10 think that more than 20% of company stock options will expire underwater.