2008 US executive compensation preview

A big factor shaping this year’s proxy season is the slowing US economy. Economic stagnation provides the ultimate “stress test” for many corporate decisions, including executive compensation programs. And talk about stress; consider these perspectives:
 

• Shareholders, who are experiencing deteriorating returns, are becoming more activist than ever and want to see compensation outcomes linked to sustained financial and share price results.

• Companies see an unpredictable economic future and are struggling with how to establish short-term incentive goals, let alone ones that are credible over a two- to five-year period.

• Boards of directors, who believe that there is always a market for top talent, are anxious to retain their own talent to provide the leadership, vision and execution needed to meet the challenges of a volatile business cycle.

Adding to these stresses, companies are trying to comply with SEC guidance clarifying the Compensation Discussion and Analysis (CD&A) disclosure requirements and responding to shareholder proposals on a variety of topics.

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2008 Executive Compensation:
Current state, future direction

We will sift through all the newly available CEO compensation data for insight on future executive pay trends.

Date: Thursday, May 15, 2008
Time: 12 noon - 1 PM ET
Cost: Free

Speakers: Diane Doubleday, Mike Halloran and Peter Oppermann

Questions: See details below or
e-mail: webbriefings@mercer.com

 
With this backdrop in mind, noteworthy trends that we think are likely to reshape how executive compensation programs are designed and pay decisions are made in 2008 and the years ahead include the following:

• Pay for performance gets the spotlight. Issues shaping this proxy season are converging in one important arena: pay for performance. Shareholders want it; the SEC is asking companies to disclose specific measures and targets; and companies are looking closely at how performance could be affected by an unpredictable economic environment. We expect to see “disconnects” – where awards based on 2007 performance are reported in 2008, a time of depressed share prices and perhaps poor Q1 earnings and revenue reports. Companies will have a difficult time getting their pay-for-performance story heard.

• Goal setting and performance measures revisited in an economic downturn. Uneasy with the market’s volatility, companies are taking a hard look at the drivers of long-term economic value, reassessing performance metrics and realigning variable compensation with financial, strategic and operational measures instead of more traditional metrics such as “earnings.” But with so much uncertainty created by the financial market crisis, companies are struggling to set credible goals. While some companies can use a relative approach (tied to the performance of an external index or industry group), they need to be prepared to pay­ – and possibly pay well – for negative absolute performance.

• Continued changes in long-term incentive strategy. Surprisingly, the pace of change in the long-term incentive arena doesn’t seem to have slowed. The experimentation with a mix of equity vehicles continues as companies add vehicles or change the allocation among options, restricted stock, performance-based equity and even cash. Some companies have looked at an uncertain economic future and made the decision to adjust, reduce or even eliminate performance-based equity until the economy stabilizes.

• Re-emergence of stock option repricing. Stock price changes put stress on equity compensation programs, particularly those relying on options. Some companies are examining whether there is a compelling rationale for repricing stock options for all holders, not just executives. The new twist on this old strategy is that now it requires shareholder approval. Whether shareholders will acquiesce when returns are down remains to be seen.

• Market fragmentation: A shift from ‘typical’ practice. As companies focus on implementing compensation programs tailored to their individual strategies, culture and priorities, we no longer see a “typical” compensation structure employed by the majority of companies – even within an industry group. Even the tech sector, where options were once the only equity vehicle used, now displays a wide array of approaches, using cash and a variety of equity vehicles. Larger companies were the first to break from this norm, but smaller and mid-size companies are quickly following suit.

• Shareholder optics has an impact. In light of increased disclosure requirements for greater transparency and specificity, companies are re-examining total executive rewards. The result: Compensation targeted to the 50th rather than the 75th percentile; more rigor in establishing peer groups for comparing market practices; increased use of clawback, anti-hedging and other policies to protect shareholders; and decreased use of perquisites and benefits. Further, higher rates of executive turnover have afforded boards an unexpected opportunity to revisit and reshape the terms of employment, including change of control and severance arrangements.

The 2008 proxy season is shaping up to be memorable. Companies are going to great lengths to adjust to the changing economic, governance and regulatory environments. Many are making major adjustments to their business model and realigning compensation accordingly. Our experience is that the CD&A has for many companies required a deep dive into the rationale for programs and intense debate over performance measures and goals. As a result, they are taking a harder look at aligning to their business strategy and compensation philosophy and adjusting grant levels, performance metrics and incentive vehicles in order to attract, retain and motivate executives, while still being responsive to their shareholders’ expectations.
 

Interested in learning more?  Attend our web briefing on May 15, 2008

2008 Executive Compensation: The current state and future direction  

Our executive compensation experts will sift through all the newly available CEO compensation data for insight on future executive pay trends.  They will discuss the issues weighing on the minds of board members and companies today, including:  

• Executive pay levels. Get Mercer’s read on CEO pay packages from our survey of Jumbo 50, Large 150 and Mid-size 150 companies. How do they compare and contrast? What do the total compensation figures signal?

• Rebalancing the LTI mix. The pace of change in the long-term incentive (LTI) arena surprisingly hasn’t slowed, and the experimentation with a mix of equity vehicles continues.  What does the CEO LTI mix look like now?

• Advances in pay for performance. Companies have long touted a pay-for-performance philosophy. Are top performing companies rewarded with larger salary increases than poor performers?  How will an unpredictable economic environment affect that? 

• Perquisites and benefits. In this new disclosure area, what do the filings reveal about changing practices? Is the value of perquisites received declining?

• The influence of shareholders. How are institutional and individual investors affecting CEO compensation decisions?

Register today! Go to www.mercer.com/webbriefings to register for this informative event. There is no fee to attend. 

We present our web briefings for our clients, potential clients and other interested parties, but we reserve the right to exclude employees of competitor firms. Please register for this event using your corporate e-mail address.