Boards Stepping up Enforcement of Performance Standards

May 11, 2010 ( - Corporate Boards are taking a bigger role in setting and enforcing performance standards, according to a new survey by independent compensation consultants Pearl Meyer & Partners.

As a result, public companies are likely to make fewer incentive payouts to executives who fail to hit specific performance targets, the firm said in its report, On Point: 2010 Executive Pay-for-Performance Survey.  

While just over one-third of public company respondents do not permit any discretion in making incentive plan payouts, a majority have the option to make modest discretionary adjustments to annual cash incentive plans. “Fairness” was the most common reason cited for applying discretion to payouts, at 44% of respondents, followed by 22% who reduce performance-based awards deemed “excessive.”  

According to a press release, 73% of survey respondents who identified themselves as outside Directors and 34% identified as managers said corporate Boards have gained influence over management in the oversight of performance-based plans over the past three years. Similarly, 68% of Directors and 29% of managers believe Boards today are taking a more active role in setting performance goals. In contrast, fewer than 15% of managers and fewer than 6% of directors believe management has increased its influence in either area.  

Nearly two-thirds (65%) of survey respondents said they believe there should be limits to executive compensation, even in cases where shareholder value climbs accordingly.  

Sixty percent of survey participants expressed confidence that their Compensation Committees fully understand the level of risk in their companies’ compensation plans. However, 21% said they lack confidence in Committee members’ understanding of risk-related issues, and the remaining respondents were uncertain.   

“Even more striking, only about one-third of survey participants said their companies have a formal process in place for risk assessment,” said Matt Turner, managing director of Pearl Meyer & Partners, who noted in the press release that such a process is now required by the SEC of all public companies.   

The study found the prevalence of risk assessment correlated with company size, ranging from 46% of companies over $1 billion that have a process in place down to 24% of companies under $100 million.

Selecting Performance Measures  

A strong majority of respondents to the survey by independent compensation consultants Pearl Meyer & Partners consider multiple perspectives and analyses in selecting performance measures for incentive plans, including business strategy, peer company practices and input from the CEO, CFO, and board members. In setting annual goals, they are more likely to consider the annual budget, long-range planning, and historical and peer performance comparisons.  

Both annual and long-term incentive plans rely heavily on financial measures of profits, growth and return on capital relative to a peer group or external index. ROIC (Return On Invested Capital) is cited most often for relative comparisons (49%), in part because it can be generated by any combination of growth, profitability, and/or asset efficiency, the announcement said.   

In contrast, 79% of respondents said their annual plans are more likely to incorporate measures of non-financial and/or individual performance factors.  

Pearl Meyer & Partners’ On Point: 2010 Executive Pay-for-Performance Survey includes data from 630 respondents at public and private companies across seven major industries, with annual revenues ranging from under $100 million to over $10 billion.  

The report can be ordered from here.