The recent Towers Perrin survey suggests that many compensation committees are struggling to set incentive plan performance targets in light of 2009 budgeted/planned results that are significantly below 2008 levels and considerable uncertainly about how quickly the economy will rebound. Almost three-quarters (73%) of the survey respondents say the financial crisis has had an impact on their approach to setting 2009 performance targets under annual incentive plans.
The most common considerations among companies reporting changes in their approach to goal setting are greater use of discretion or judgment in determining awards, setting lower threshold performance levels, and greater use of relative performance measures instead of absolute measures (e.g., setting a revenue growth target at 10% above median performance for the industry, rather than a fixed growth rate), according to a Towers Perrin press release.
Depressed share prices are posing serious complications for many companies in trying to decide on the size of their 2009 grants under equity-based long-term incentive plans. Companies that have targeted a fixed value of long-term incentives to grant face the prospect of having to award significantly more shares to achieve the target value, increasing the number of shares used for incentive purposes and prompting possible shareholder concerns about dilution, Towers Perrin said.
The vast majority (86%) of the respondents report that their companies’ shares have declined more than 15%, while over a quarter (28%) report share price declines of more than 50%. Doug Friske, a Towers Perrin Managing Principal and one of the leaders of the firm’s Executive Compensation and Rewards practice, said long-term incentive values are expected to decline between 15% and 20% on average.
A growing number of companies are also wrestling with questions about how to deal with underwater stock options and whether to reset performance goals on outstanding awards under long-term performance plans. To date, just over a quarter (26%) of the companies either have addressed underwater options or are currently reviewing the issue (See Google Offers Employees ‘Underwater’ Options Exchange ).
Even fewer of the companies surveyed appear to be moving toward adjusting the performance goals for outstanding cycles under their long-term performance plans to reflect the current business climate. Only a few companies (2%) have recalibrated performance goals or plan to thus far, although 11% of the respondents are now considering such steps.
Overall, the modifications will mean lower -- or no -- 2009 salary increases and bonuses for 2008 performance for many U.S. employees, along with reductions in the value of 2009 equity grants for many executives, according to a press release. The survey also shows that many companies are rethinking their approach to determining the size of their 2009 long-term incentive grants in light of significant stock price declines and considering what to do about underwater stock options.
Reductions in merit/salary increase budgets are the most prevalent response to the crisis to date, with salary freezes completed or being contemplated by about four out of 10 U.S. companies. Among the survey respondents that are not freezing their 2009 salary budgets, the average overall pay increase this year has declined to 3% from the 3.7% level companies were planning before the stock market/economic tailspin, the press release said.
More than half (54%) of U.S. companies will pay smaller bonuses for 2008 performance than the prior year, due to their deteriorating financial results. Four in ten survey respondents expect to pay executives bonuses 25% or more below last year's levels.
However, approximately 62% of respondents indicated they are concerned about the potential impact of pay changes on their ability to retain high performing talent.
The survey was conducted online from January 6 - 14, 2009, and targeted U.S.-based midsize and large companies. A total of 513 companies participated in the survey.