Compensation committees expand influence over salary and incentive issues according to national study from KPMG

Business Wire, Jan 13, 1995

LOS ANGELES--(BUSINESS WIRE)--Jan. 13, 1995--The expanded proxy disclosure rules adopted by the Securities and Exchange Commission (SEC) that took effect in 1993 are creating dramatic changes in executive compensation, according to a national study released by KPMG Peat Marwick LLP Compensation and Benefits Practice and the American Compensation Association.

The ``Executive Pay and Company Performance'' study, which updates findings from a 1991 study, found that one of the most significant shifts caused by the SEC's expanded proxy disclosure rules is the increased role of compensation committees. Among other things, the new disclosure rules require each compensation committee to report on the company's compensation policies and practices and to discuss the committee's compensation decisions made during the year.

In response, compensation committees are taking a much more active role. They are now more committed to representing shareholder interests and carrying out their fiduciary responsibilities by establishing the company's overall compensation strategy and reviewing financial measures on which incentives are based.

``The increased role of compensation committees is helping prevent inappropriate compensation,'' said John D. Bloedorn, partner and Midwest regional practice director for KPMG's Compensation Practice. ``The committees are ensuring that executives look out for the shareholders' best interests -- not just their own.''

The study, which compares compensation practices of higher- performing companies (based on total shareholder return) with those of lower-performing companies, found that compensation committees in 1994 were meeting more frequently.

They were also more involved in establishing compensation strategy, reviewing and approving new compensation plans and the financial or other performance measures upon which they are based, determining executives' base salaries, and administering compensation programs.

The study also found that virtually all companies are using incentives to link pay to company performance, and the number of employees in such plans has increased.

``Incentives can expand the team committed to delivering results and can get employees to focus attention on company goals and shareholder returns,'' said Bloedorn. ``Because salaries are relatively fixed, or sticky on the downside, a lower fixed cost may result through the use of incentives. While increased eligibility may mean larger total payouts, this can be mitigated by the resulting performance success.''

According to the study, eligibility for long-term incentive plans at higher-performing companies has increased to 28 percent of exempt employees, up from 16 percent in 1991. At lower-performing companies, 21 percent of employees are eligible, up from 7 percent three years ago.

The percentage of exempt employees eligible for annual incentive plans also has increased, from 36 percent in higher-performing companies in 1991 to 61 percent in 1994, and from 26 percent in lower-performing companies in 1991 to 48 percent today.

Another interesting finding is that most of the higher-performing companies place a greater emphasis on long-term incentives for senior executives, whereas most lower-performing companies place a greater emphasis on annual incentives.

The measurement for long-term incentive plans is most frequently based on earnings per share, total shareholder return and net income. When asked about the content of long-term incentive plans, 82 percent of respondents cited non-qualified stock options as the most frequently used elements.

``While non-qualified stock options will remain popular, the mix of long-term incentive plan elements could change based on recent tax changes and potential new accounting rules for stock plans,'' said Peter Chingos, partner and national practice director in KPMG Peat Marwick's Compensation Practice. ``It's likely that incentive stock options and performance shares will increase in use in the near future.''

The study also examined topics such as attitudes of human resource executives and senior operating executives toward compensation, the motivational impact of incentives, the use of formal executive compensation strategies and the percentage of organizations requiring executives to own company stock.

How the Study was Conducted ---------------------------

A total of 339 items of inquiry were included in the study, with separate questionnaires for human resources and senior operating executives. The 1994 sample was divided into performance groups based upon total shareholder return results during the past five years. Shareholder return is defined as the share-price appreciation plus reinvested dividends.

KPMG Peat Marwick LLP's Compensation and Benefits Practice provides human resources consulting services in the areas of performance and compensation, including executive compensation and employee reward systems; and employee benefits, including defined benefit, 401(k) plans and health benefits.