Economy, shareholders pressure executive pay

HR Magazine, May, 2008 by Stephen Miller

The slowing U.S. economy is changing executive compensation practices, as reflected in proxy statements filed by public companies so far in 2008, according to an analysis by HR consultancy Mercer. Corporate leaders see an unpredictable economic future and are struggling establishing incentive goals.

Meanwhile, the Securities and Exchange Commission's (SEC) directives expand disclosure of executive compensation practices.

And shareholders experiencing deteriorating returns are becoming more activist than ever and want to see compensation linked to sustained financial and share price results.

As a result of these mounting pressures, the researchers say "the 2008 proxy season will surely be memorable."

Here are Mercer's top changes to look for in 2008:

* Pay for performance. Shareholders want it, the SEC wants companies to disclose specific measures and targets, and executives are looking closely at how performance could be affected by an unpredictable economic environment.

Mercer's authors, however, also expect to see "disconnects" where awards based on 2007 performance are reported in 2008, a time of depressed share prices and perhaps poor first-quarter earnings and revenue. Shareholders may not accept their pay-for-performance claims.

* Goal setting and performance measures revisited. Uneasy with the volatility of the market, executives are reassessing their performance metrics and realigning variable compensation with financial, strategic and operational measures, as opposed to more traditionally used metrics such as "earnings," researchers found.

* Continued changes in long-term incentive strategy. The experimentation with a mix of equity vehicles continues as companies alter the allocation among stock options, restricted stock, performance-based equity and even cash.

Some companies will reduce or even eliminate performance-based equity until the economy stabilizes, researchers found.

* Re-emergence of stock-option repricing. Changes in stock prices put stress on equity compensation, particularly that relying on options. Some companies examine whether there is a compelling rationale for repricing stock options for all holders, not just executives. The new twist on this old strategy now requires shareholder approval. It remains to be seen whether shareholders will acquiesce when their returns are down.

* Market fragmentation. As companies focus on compensation programs tailored to their individual strategies, culture and priorities, analysts no longer see a typical compensation structure employed by the majority of companies--even within an industry group.

* Shareholder oversight. The SEC's increased disclosure requirements have prompted companies to re-examine total executive rewards.