Shareholders are voicing their disapproval over excessive executive pay. HR managers need to know the public’s “breaking point” for each pay element, says consultant Kurt Fichthorn.
Fichthorn, who is vice president in the Philadelphia office of the Hay Group, offers the following chart to clarify what employers want and how it compares to what the public wants.
|
Topic Area |
What Makes Business Sense? |
What Do Shareholders Want? |
Where’s Their Breaking Point? |
|
Pay Philoso-phy |
Pay positioning that maps to competitive positioning |
Pay positioning that maps to competitive positioning |
Targeting P75 without P75 performance |
|
Pay Mix |
Mapping pay mix to key time horizons for the business |
>50% in LTI for CEOs |
>50% in STI |
|
Perfor-mance Measures |
A balance that rewards something when returns are low but the team outperforms plans and the market |
High absolute returns AND relative outperformance |
Big payouts when shareholders lose |
|
STI /Bonuses |
Allowing some discretion when warranted; Balancing financial and strategic measures |
Formula-driven financial performance |
Overriding the formula with big discretionary payouts |
|
LTI |
`Performance vesting when linked to the “right” measures and key milestones |
Less dilution, Performance vesting |
Lack of a performance-vested vehicle |
|
Perqui-sites |
Some of these, some of the time |
None of them |
Gross-ups, excessive personal use of plane |
|
Change in Control |
Incentive for executives to be aligned with the best interest of shareholders |
Double-triggers 2x payouts (from 3x) |
Single triggers–even on equity–and gross-ups |
|
Managing Risk in Pay |
Some balance – but not too much; |
Balance, but with a focus on shareholder value |
One measure that drives most of the pay |
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What Does the Future Hold for Executive Compensation and Benefits?
Looking at the results of the recent Hay Survey and his knowledge of the executive compensation landscape, Fichthorn sees the following:
- Executive benefit packages have not been altered significantly as a result of the economic recession.
- Organizations continue to offer a suite of benefits to executives to attract and retain their key talent.
- However, proxy disclosure requirements and public scrutiny have caused organizations to ask the question: Is this benefit critical to the execution of the executive’s job duties? Increasingly, if the answer is “No,” the benefit is eliminated.
- Organizations will continue to offer deferred compensation programs in order to be competitive, although the reduced participation in these programs may be an indication of uncertainty regarding future tax rates.
- Companies will seek greater “longer-term” related compensation. The years 2010 and 2011 saw a number of companies increase the time horizons of incentives by extending vesting periods and implementing holding requirements. (Fichthorn is beginning to see some programs that take vesting/holding times beyond 3 to 4 years.)
- The public will continue to focus on issues like CEO succession (Apple, Hewlett-Packard, etc.), environmental impact (BP Petroleum), worker safety (Massey Energy), and data security (TJX), and that will cause many boards to review their own oversight policies, resulting in more work by boards and committees in the short term and possible long-term changes in practices.
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The survey results are telling. The fact that the recession had little to no effect on executive benefits is surely one of the reasons for the intensified shareholder scrutiny of executive compensation. It’s hardly surprising that shareholders who took significant hits think the responsible executives should likewise suffer some repercussions.