Incentive Awards Will be Increasingly Tied to Performance, Mercer Predicts

March 3, 2005 ( - Better financial results in 2004 will likely lead companies to produce stronger annual incentive awards for executives based on such performance in 2005.

This is one of the predictions made by Mercer Human Resource Consulting’s latest study, The New Normal: 2005 Executive Compensation Preview. The report indicates that companies, after several transitional years, are settling into a “new normal” in compensation.

“There is also a much greater effort to embed performance metrics into long-term incentive plans and make a demonstrable longer-term connection between pay and performance.” the study asserted.

Also included in the predictions – based on what Mercer thinks that latest corporate proxy statements will reveal about executive compensation – are:

  • the rebalancing of long-term incentives. Although companies initially ran away from stock options, they will now seek a middle ground that includes service-based restricted stock, performance-based restricted shares, and cash elements.
  • investor impact. Investors are becoming more active and will continue to be a driving force behind compensation change. By using their power to withhold votes for compensation committee members and voting against compensation proposals, they will continue to be a player in the “new normal.”
  • a move towards the middle. Although in the past many companies benchmark their pay to the 75 th percentile and not the median, this will change as companies set their benchmark pay to the median and to still attract talent, offer more performance-based incentives.
  • communication. With so many recent changes in compensation, it can be difficult to keep up with the latest alterations. Mercer predicted that companies will increasingly use Web-based tools to model different performance scenarios and outcomes. Also, companies will increasingly use these tools to keep company performance and rewards in front of employees.
  • gaining share plan approval. Companies will more and more look towards shareholders for approval of the latest compensation packages, Mercer predicted.
  • compensation committee specialization. With more work, members of these committees will increasingly become more specialized through training and educations. More preparation, as well as longer meetings will be the norm.
  • rising director compensation. Because of the increasing amount of time spent on the job, director pay will continue to rise, according to Mercer. Transparency surrounding such compensation will likely increase as well.