Fichthorn , vice president in the Philadelphia office of Hay Group, was joined in his presentation at a recent BLR/HRhero webinar by Martin Somelofske, a senior principal in Hay Group’s Metro New York office. Fichthorn suggests that the following trends will characterize executive compensation in the upcoming year:
- Continued government interest and involvement, specifically through Dodd-Frank
- Due to shareholder interest, and proxy advisory firm influence, continued conservatism around certain pay program features and design, including:
- Double triggers on equity plans (single triggers will be much less prevalent)
- Lower severance multiples
- Elimination of excise tax gross-ups and fewer perquisites
- Increased share ownership guidelines (that is, standards increasing number of shares to be held, and the length of holding
- Due to current performance equity designs, more volatility of outcomes:
- More pay for performance
- More using stock options and PSUs (performance stock units) in their LTI program
- Increased use of total shareholder return (TSR)-based performance plans to ensure executives don’t win if shareholders lose
- More companies defering a portion of bonuses into stock (This is both a “risk in compensation” issue as well as a mechanism to enforce clawbacks)
Don’t be fooled by the modest shareholder reactions of 2011; says Fichthorn. If performance declines while executive pay does not, you can be sure that shareholders will make themselves heard.
Increasingly, he adds, executive compensation packages have to reflect the answers to these questions:
- What makes business sense?
- What do shareholders want?
- Where’s their breaking point?
Pay Philosophy
We’re going to see pay positioning that maps to competitive positioning. So, for example, if pay is targeted to the 75th percentile, performance should be in the 75th percentile to reap the reward.
Performance Measures
A balanced approach should reward something evenwhen returns are low, but a lot when the team outperforms plans and the market. Certainly, there should be no bigpayouts when shareholders lose.
Short-Term Incentives/Bonuses
Some discretion should be allowed, and again there is the need for balancing financial and strategic measures. Nevertheless, shareholders want formula-driven plans, not casual, discretionary plans.
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Long Term Incentives
Expect a move toward performance vesting linked to key milestones. That is, shares vest only when a certain milestone is reached (earnings per share, sales, profits, etc.)
Perquisites
Shareholders don’t like them, Fichthorn says and, typically, perquisites are small compared to compensation. For example, says Fichthorn, shareholders don’t like excessive personal use of the company plane.
Change in Control
Shareholders want the incentive for executives to be aligned with the best interest of shareholders. So, employers are likely to:
- Eliminate single triggers and go to double-triggers
- Make separation payouts 2x instead of 3x
- Reduce the use of gross-ups
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The article mentions negative shareholder reaction if pay increases even when performance doesn’t, but what about rank-and-file reaction? You can see real morale and motivation problems when earnings and wages are stagnant, but the C suite folks continue to get significant raises or bonuses.