Survey Finds Companies Working to Match Pay to Performance

“Compensation Planning: Looking Ahead to Executive Pay Practices in 2010,” a new report by independent compensation consultancy Pearl Meyer & Partners, found that even companies who believe they are outperforming their peers project only modest salary increases. A press release said survey respondents also indicate they are taking a cautious approach to both the design and payout levels of short-term and long-term incentive rewards.

In terms of 2010 executive pay decisions, there were clear differences between those expecting their performance to be “above peers” for 2009 and those expecting results “lower than peers,” according to the announcement. Among stronger performers, 53% anticipate base salary increases above 3% (compared to 32% of lower performers), 86% expect to receive a bonus payouts for fiscal 2009 performance (compared to 65% of lower performers), and 40% expect an above-target payout (compared to 31% of the lower performers).

Nearly 64% of respondents froze or trimmed executive base salaries in 2009, and more than 20% of respondents expect to freeze salaries in 2010. Among companies projecting strong performance through the end of this fiscal year, nearly 90% say they will limit salary growth in 2010 to 4% or less.

In total, nearly one-quarter of respondents do not plan any annual incentive payouts in 2009, and the majority of those making payouts expect award levels to be below target. Twenty-two percent of respondents changed their annual performance metrics in 2009 (e.g., from EPS to cash flow) and 16% widened the range of performance eligible for payouts.

For 2010, 39% of respondents expect to raise the bar on performance goals and 28% plan to switch to relative performance metrics (where performance is measured against peer firms or industry indices).

When asked to identify the compensation issues that raise the most concern for 2010, 23% of respondents indicated that they are “extremely concerned” with “selecting performance measures and setting goals for incentive plans.” Additionally, 21% of respondents are “extremely concerned” about the issue of “modifying pay programs for a changing economic environment.”

About one-third of respondents to Pearl Meyer & Partners' executive compensation survey expect to increase the number of shares in long-term incentive (LTI) grants to executives in fiscal 2009, although, depending on the timing of the awards, grant values may be down relative to 2008 due to lower share prices.

Companies also are contemplating LTI modifications heading into 2010 to promote a longer term performance perspective, as the survey found:

• 10% have implemented new executive stock ownership guidelines and 4% increased existing requirements.
• 14% have contemplated adding new "hold until retirement" and 7% considered new "hold past retirement" provisions for equity grants to executives, although very few actually implemented these plans in 2009.
• 4% increased the length of vesting (e.g., from 3 years to 4 years) for stock grants, and another 3% anticipate implementing such changes in 2010.

While the vast majority of respondents did not revise their arrangements for payments to executives upon termination or change-in-control, there is a clear trend towards decreased benefits in this area, according to the press release. Eight percent of respondents in the last year decreased gross-up provisions to executives, which cover the taxes triggered by "parachute" payments following a change-in-control.

Finally, the survey found companies migrating away from executive perquisites such as:

• Personal use of corporate aircraft: 13% reduced in 2009 and about 3% are contemplating a decrease in 2010.
• Car allowance: 16% reduced in 2009 and about 9% are considering doing so in 2010.
• Reimbursements for financial planning services: 12% reduced in 2009 and more than 7% are considering a reduction in 2010.

Survey participants included 395 organizations from the Fortune 50 to emerging high-growth organizations, of which nearly three-quarters are publicly traded and 20% are closely or privately held, with tax-exempt or governance-charted organizations accounting for the remainder.

Full survey results are at www.pearlmeyer.com/execcompplanning.