Execs Expecting More Pay Scrutiny

October 6, 2009 (PLANSPONSOR.com) - If the next two years brings more outside scrutiny of employer's executive pay practices, virtually none of the HR executives in a recent Watson Wyatt survey will be surprised.

A Watson Wyatt news release said 94% of the HR representatives surveyed expect such executive pay scrutiny to come from new Congressional legislation, Securities and Exchange Commission (SEC) regulations, and pressure from the public. But it is apparently for the better, as 72% of respondents expect to end up with stronger pay and performance ties, the survey found.

If shareholders have input on how employers should structure their executive pay practice, the majority of HR executives seemed happy to hear it. Sixty percent of companies reported having little concern regarding possible say-on-pay requirements.

According to the survey, the majority of respondents appear to be already taking steps by beefing up their pay practices disclosure to explain pay program rationale and appropriateness to shareholders (70%) or at least trying to identify potential executive pay issues/concerns in advance (67%).

Also, with many pundits seemingly quick to accuse corporate executives of excessive risk-taking , 42% of companies are concerned about potential legislation assessing executive pay for “excessive risk.” Most companies have addressed risk: 54% have or plan to add a formal risk assessment process, up from 30% in March; and 50% have or plan to certify in the proxy that a risk assessment has been performed, up from 31% in the March survey.

“Companies recognize that changes to executive pay programs will be needed to stand up against growing criticism and increased pressure,” said Ira Kay, global director of executive compensation consulting at Watson Wyatt, in the news release. “However, this change will be a long-term process and one that will require companies to focus on strengthening performance-based incentives, balancing risk and rewards, and meeting proactively with key stakeholders to discuss their pay program rationale.”

On another issue, Watson Wyatt said the economy may be starting to show signs of recovery, but it is not expected that employers who slashed costs will put salary levels back where they were before the downturn.

Watson Wyatt said 63% of companies are currently not planning to reverse or restore changes made to executive salaries in the next six months.

Other findings include, according to Watson Wyatt:

  • Only 12% of respondents plan to decrease their next fiscal year's long-term incentive (LTI) grant dollar value over this year's, compared with 33% in March. Almost half (45%) do not expect their LTI grant values to change.
  • Companies report moderate-to-significant concern about caps on incentive compensation (53%), expanded CD&A disclosures below the top five (53%), and elimination of the 162(m) performance award exemption (53%).
  • Nineteen percent of companies have eliminated their golden parachute tax gross-up provisions, and 44% of companies have or are considering clawback policies.

The Watson Wyatt survey was conducted in late September and includes responses from HR and compensation executives at 187 companies. More information is available at www.watsonwyatt.com/ExecPayOct09.