Companies Retooling Executive Comp Policies

March 12, 2003 ( - Companies are making changes to their executive compensation policies and practices in light of current economic, regulatory and governance trends.

Two-thirds of the 178 US companies polled indicated taking steps or considering changes to their long-term incentive (LTI) and current executive compensation plans.   Primary among the LTI plan trends are 30% restricting the eligibility of stock options at lower levels and 27% of companies surveyed converting stock options to restricted stock or performance share plans, according to the Hewitt Associates’ report “Hot Topics in Executive Compensation.”

Executives will also be hit in the pocket book in the immediate future, as executives’ merit increases of less than 4% this year are being granted by two-thirds of those polled. In fact, the median merit-increase budget for executives is 3.5% in 2003.

At the same time, executive bonus payouts for performance in 2002, although consistent with last year’s levels, are well below historical norms. Fifty-two percent of companies anticipate bonus payouts will be at or less than 90% of target in 2003, with approximately one-third expecting bonuses to be less than 70% of target.

Not surprisingly, almost half of the companies anticipate significant challenges in communicating these program changes to participants

Stocking Up

Examining stock option trends in LTI compensation, only 17% of companies surveyed indicate they will grant a larger stock option award size in 2003, compared to 2002. More specifically in relation to last year’s stock option award:

  • 40% anticipate this year’s grant to be between 90% and 100%
  • 17% said the award will be between 70% and 90%
  • 13% indicated this year’s grant will be less than 70%

As for the shares companies currently have left to grant, Hewitt’s study reveals that 57% of companies surveyed believe enough shares remain in the pool for several years’ worth of grants, with the remaining companies planning to go to shareholders in the next few proxy seasons.

Additionally, most organizations in the study are actively looking to reduce run rates, a common measure of stock dilution.   The run rate is the number of stock options granted each year divided by common shares and options outstanding, plus remaining shares available to grant.   Thus, the higher the run rate, the greater the dilution of stock.

When asked about their anticipated run rate levels for 2003, slightly more than two-thirds (68%) are planning a lower run rate in 2002.   Looking to specific run rate targets, the study found:

  • 44% anticipate a run rate lower than 1.51%
  • 25% expect a run rate higher than 1.75%
  • 17% project a run rate of between 1.51% and 1.75%
  • 14% responded to it being too early to tell what their run rate will be in 2003.

“Hot Topics in Executive Compensation” is available by contacting Hewitt at