Watson Wyatt: Corporate Compensation Due For Change

August 1, 2003 (PLANSPONSOR.com) - New compensation and incentive programs may be on the horizon for corporate America in the wake of a downward trend in corporate compensation.

Compensation for top corporate management has fallen for the past three years following 20 years of steady increases, with many consultants pointing toward sub-4% merit increases not only in 2003, but also 2004 (See Pay Increases at 3.3% in 2003, 3.5% in 2004 ). Couple this with some high-profile companies now weighing the continued use of stock options as a form of compensation ( See Microsoft Wants to Give Workers a Real Stock “Option” )and companies may be looking for a compensation philosophy change, according to a new report published by Watson Wyatt Worldwide.

Much of this decline is being attributed to the impact little – if any – stock market appreciation has on highly leveraged stock options. For example, if the stock market goes through a period of single digit annual increases, overall total compensation packages will also be lower.

“Stock options and other incentive pay-based tools that tie individual and company performance have been the heart of America’s global competitive advantage for many years,” Ira Kay, national director of compensation consulting at Watson Wyatt, said in a statement. “They have created enormous value for companies and for the overall economy, even while factoring in the recent stock market correction. But the heavy reliance on stock options is beginning to shift.”

Other Factors

But stock options are not the only perceived culprit of reduced compensation levels. Other reasons cited in the report that will lead to reduced corporate compensation levels include:

  • increasing demand from institutional investors for more shareholder-friendly compensation programs
  • companies pushing for more employee stock ownership programs
  • continuing softness in the labor market putting employers more in control of pay levels than previously
  • the impending change in the accounting rules for stock options.

Thus, with the old guard of incentive programs not being what they used to be, companies are now forced to scramble for new incentive programs that can help sustain employee motivation and improve overall corporate performance. “As options play a reduced role in compensation packages, companies will need to ensure that they maintain a program of sufficient incentives to encourage and acknowledge progress,” said Kay. “When the labor market tightens again, companies will need to be ready with new compensation strategies that maintain competitive advantages and continue to attract and retain the best employees.”

A summary of the report, Changing the Way America Gets Paid, is available at www.watsonwyatt.com .