Benefits April 10, 2003

Executive Compensation Reaches Worker Levels

April 10, 2003 (PLANSPONSOR.com) - Responding to investor concerns over ever escalating executive compensation figures, pay increases for executives were in the same range as the rest of the general population.
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Corporate executives’ pay increases are averaging around 3% to 4% in 2003, equivalent to those in the general workforce, and the increase in the cost of living. However, the number increases in those industries that are weathering the economic downturn the best – consumer durables, real estate, and financial services for example, where it is not uncommon to see 6% to 8% increase levels for executives, according to a study by Clark-Bardes Consulting.

Cited as reasons for the lowered increases:

  • public backlash over executive compensation, resulting in many firms not giving executives increases
  • executive salary freezes because of similar actions in the rest of the workforce
  • pay cuts, generally in the 5% to 10% range, in companies that needed to do this in order to try and get back to profitability
  • executive base salaries are significantly linked to firm revenue size, and revenues for most firms are not growing significantly, are flat, or even down.

Bonus Play

Much like the base salary component of executive total compensation packages, bonuses, for the second straight year, have been hammered in most industries as firms struggle with revenue growth and profitability.

Aside from a growing number of executives who did not receive a bonus, due to the board of directors holding the line on paying for performance, or lack thereof, nominal bonuses are being paid in the 25% to 50% of base salary target levels. Considering normal executive bonus amount can exceed 100% of base salary target levels, these “consolation prizes” are being offered for exceeding threshold performance levels or recognizing that strides were being made in the company that were not being reflected in current year financials given the weakness in the economy.

However, bonus levels seem to be a leading indicator of a more “balanced scorecard” approach to short-term incentive plan metrics. Financials, most often revenue growth and some measure of profitability, still dominate designs, and in particular funding mechanisms. However, customer, employee, and process metrics continue their increase in importance as firms continue the search for the underlying drivers of improved financial performance. Therefore, even though bonus targets are generally flat, a small number of firms, sensing a rebalancing of the mix of compensation will occur, have increased bonus targets rather than increasing base pay levels.

Pay Mixture

Actual pay mixes for executives have changed, as bonuses are down significantly, and in general, the value of stock grants has dropped tremendously given the market collapse. As a result, base pay as a percentage of total remuneration has increased approximately 10% in 2001 to greater than 15% in 2002. However, the mix has only changed because of poor or underperformance and a collapse in the value of options, not because of conscious decisions to change the structure of executive pay.

Clark-Bardes says significant change in the overall pay mix will not occur until either stock options are expensed, putting them on equal-footing with other remuneration vehicles such as cash and restricted shares or there is a fundamental rethinking about the roles/purposes of various compensation elements and agreement that the portfolio of rewards had gotten out of balance.

Optioning Expenses

The study did not find stock option use decreasing until option expensing is mandated, because these vehicles offer a favorable accounting/tax treatment and the potential for a significant link to increasing shareholder value. Further, equity-based vehicles offer the greatest potential for significant upside opportunity/capital accumulation for executives without a significant cash outflow from the company and it is critical to keep executives and other key employees focused on balancing short-term and long-term company objectives.

While grant values declined, the number of shares actually increased, albeit via various stock option plans. Restricted stock usage increased in approximately 40% of client organizations and a significant number of firms began using the opportunity approach, grant levels as a percentage of shares outstanding, versus a value approach, such as Black-Scholes, to setting grant levels.

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