Benefits May 5, 2009

Directors Say Exec Pay Programs Should Change

May 5, 2009 (PLANSPONSOR.com) - A majority of directors who serve on corporate boards believe that the executive pay programs of U.S. companies need to change as a result of the financial crisis, according to a new survey by Watson Wyatt.
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A Watson Wyatt press release says nearly two-thirds (63%) of outside directors surveyed said they believe American companies should modify their executive compensation programs to adapt to new economic realities. Additionally, most directors (68%) are not concerned or are only slightly to moderately concerned about the retention of high-performing executives.

Seventy percent of directors expect executive pay opportunity to decline over the next two years, the announcement said. More than a third (34%) of directors said their companies had already reduced salary, target bonus and/or long-term incentive award levels, and 6% plan to make those changes in the next six months. Another 48% are considering those changes. (See Survey Finds Companies Adjusting Executive Pay Programs )

Although underwater options are at historically high levels, 58% of respondents whose companies grant options do not think it is appropriate to take action such as repricing or exchanging them for new shares.

The survey also found companies are beginning to address the issue of excessive risk in executive compensation. Twenty-three percent of directors are moderately to greatly concerned that legislation addressing “excessive risk” will have an effect on their executive pay programs. Roughly one quarter (24%) said they are concerned to the same extent about expanded clawback coverage.

However, the vast majority has not yet made any changes around measuring or limiting risk in their executive pay packages. Only 18% have added a formal risk assessment process; 15% have curtailed stock option grants; and 10% have certified in their proxy statement that a risk assessment has been performed.

Other survey findings, according to the press release, included:

  • Almost half (49%) of directors noted their companies have already made or are planning to make changes to their long-term incentive (LTI) plan vehicles. Among these companies, 53% plan to put more emphasis on performance-based shares, and 26% plan to put more emphasis on performance-based cash plans.
  • Thirty percent of directors expect companies to change their performance metrics around annual bonuses in the current fiscal year, and 27% expect to change their performance metrics around long-term performance plans.
  • A majority (54%) of directors surveyed said legislation and public pressures would have little or no effect on improving pay for performance.

Watson Wyatt’s survey was conducted in March and April 2009 and includes responses from 85 outside directors. More information is at http://www.watsonwyatt.com/BoardViewReport .

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