Corporate Long-term Incentive Packages Still Changing

May 10, 2005 ( - Facing regulatory and shareholder pressure to link executive pay with performance, companies are reworking the eligibility criteria, design, and size of executive long-term incentive awards.

That was a key conclusion of a new survey of 117 large US companies on the executive long-term incentive issue by Hewitt Associates, according to a Hewitt news release.

class=”NormalDS”> The Hewitt announcement said that nearly three-fourths (71%) of companies are revising or plan to change their long-term incentive program design ahead of mandatory stock option expensing. All public companies are required to expense options by the start of their 2006 fiscal year (see SEC Makes it Official: FASB 123 Implementation Date Moved Back Again ).

class=”NormalDS”> Hewitt said many organizations are shifting a piece of their long-term incentive mix from stock options to restricted stock (43%) and performance-based shares/units (33%). Not only that, but 35% of companies are limiting the number of employees eligible for long-term incentive plans.

class=”NormalDS”> “As corporate boards come under increasing scrutiny from shareholders and regulators, they’re shifting more executive pay to performance-based equity, which has a greater focus on long-term results,” said Tracy Davis, senior consultant for Hewitt Associates, in the news release. “Moving forward, we expect this to have a major impact on executive earning potential, as a growing portion of their pay will be determined by their success in achieving long-term business goals and how well they meet shareholder expectations.”

class=”NormalDS”> Hewitt’s study also shows that many companies (42%) aren’t fully replacing stock option grant values as they move to other forms of equity incentives. In fact, approximately four in 10 companies are using a 3-to-1 value ratio when converting to restricted stock, and a 4-to-1 ratio when converting to performance-based shares. Only a minority of companies are fully replacing stock option values in shifting to other forms of incentive compensation.

class=”NormalDS”> Hewitt’s study reveals that 2005 executive base pay increases are consistent with last year, with more than 70% of companies awarding increases of less than 4% (median of 3.5%).

class=”NormalDS”> As for executive bonuses, more companies (68%) are awarding at or above target this year (for 2004 performance), compared with last year (46%). Specifically, 47% of organizations are paying between 100% and 149%, and 21% of companies are paying 150% or more of targeted bonus.

More information about Hewitt is at .