Incentive Payouts May Reflect Company Results and Economy

January 14, 2009 ( - As companies finalize their decisions related to incentive payouts for 2008 and equity awards for 2009, they are giving significant weight to examining their year-end results and the broader economic environment, according to a new Mercer survey on annual and long-term incentives.

A Mercer news release said that although the majority of participating companies are still finalizing their decisions, those that have made early decisions – approximately one-fifth of respondents – are making changes.

Mercer observed a theme of anticipated reduction in long-term values for 2009 among many of those who have made early decisions. Other trends include: paying below target annual incentive payouts based on weak 2008 performance, moving away from stock options to use other long-term incentive vehicles, anticipating the use of selective retention awards, and reducing long-term incentive participation, according to the news release.

“The early deciders are telling us that 2009 may be a game changer for long-term incentive granting practices. Many companies are anticipating long-term incentive values that are lower than 2008 levels, perhaps a cut by 10% to 30%,” said Bruce Greenblatt, a principal in Mercer’s executive remuneration consulting business, in the announcement. “Furthermore, while the number of shares granted may be flat or increase, the value delivered in 2009 will be lower than 2008 at many companies given current stock price levels.”

According to Mercer's survey, approximately one-half of respondents plan to maintain the 2008 grant value of long-term incentives for their 2009 grants, while the remaining companies are either still formulating their approach or have decided to reduce grant values.

Many companies expect that depressed stock prices will cause them to award more shares in 2009 compared to 2008. Approximately 40% of companies expect share usage levels to increase in 2009. Slightly over one-quarter (27%) are expecting their run rates to increase by more than 10% compared to 2008 levels.

The majority of companies expect below-target payout levels for their performance based long-term incentive programs in 2008. In these cases, 75% do not expect to adjust calculated payout levels - holding the pay for performance standard, Mercer said.

Additionally, more than three-quarters (78%) of survey respondents do not plan to reprice or exchange underwater stock options. Slightly less than half of companies are taking a "wait-and-see" approach to underwater options, and fewer than 5% are planning to take action.

As for annual incentive programs, the survey suggests the impact of the economy on company performance is reducing annual incentive payouts for 2008 performance. Nearly two-thirds (64%) of companies are expecting below-target annual incentive payouts.

However, 29% of respondents are considering some form of a discretionary award to select employees or all eligible participants - recognizing that top talent needs to be appropriately rewarded for their contributions even in a difficult economic environment, according to Mercer.

Mercer's survey, "Weathering the Storm in 2009," includes responses from nearly 200 U.S. organizations that have median annual revenue of $2.9 billion.

For the December 11, 2008 Web briefing on the survey results and other trends, go to .