Exec pay curbs unlikely to assuage public anger

2009

There are serious fears this week's vital G20 summit of world leaders in London will be marred by rioting and violence, fuelled by deep anger over the global economic crisis and the excesses of executive pay and bonuses that have been making the headlines with depressing frequency over the past few months.

Yet, while no one is condoning the sometimes breath-taking rewards for failure that have come to light, it is clear many companies have heard the public's anger loud and clear.

According to statistics from consultancy Watson Wyatt there has been a sharp increase in the past three months in the number of firms that have acted to freeze salaries, add claw-back policies to executive pay programmes or cap or slash their bonuses for senior managers.

Its March survey of 145 U.S firms found that the number freezing executive salaries had risen to more than half – 55 per cent – against the fifth reported in a similar poll in December.

Just under half also said they planned to slash this year's bonus pool, with an average decrease of about 40 per cent.

Just under a quarter had added a claw-back policy to their remuneration policies, while a third also expected what they paid in long-term incentives to fall, with an average decline of 35 per cent.

Almost four out of 10 said they already reduced or planned to reduce long-term incentive grants, arguing that such a move was simply the "right thing to do in response to shareholder value".

"The recession has shone a light on executive pay, causing many companies to re-evaluate the long-term implications of their executive pay policies," conceded Andrew Goldstein, North American co-leader of executive compensation consulting at Watson Wyatt.

"Although boards are under pressure to make changes, it's still not clear whether the changes they have made have been aggressive enough to placate shareholders," he added.

More firms were also changing, or planning to change, the type of long-term incentives used, with more than four out of 10 placing a greater emphasis on time-vested restricted stock.

What's more, fewer than half felt the reductions in salary, bonus and long-term incentives seen over the past weeks and months would be later restored, suggesting we may be seeing possibly a permanent change in the executive compensation landscape.

It was a similar picture in the UK, with a Watson Wyatt survey in January finding that British companies were taking an increasingly conservative approach to base salary increases.

There was a significant difference in expected base salary increases between high and low performing companies, with 82 per cent of the low performers freezing executive salaries but only 38 per cent of the high performers doing so, it argued.

A significant proportion of long-term incentive awards were also going to be allowed to lapse in 2009.

"Pay trends in the US – especially at the executive level – often point the way for how things will develop in Europe, and in particular the UK," said Sue Bartlett, a senior reward consultant at Watson Wyatt.

"So far the recession has caused U.S companies to re-evaluate the long-term implications of their executive pay policies. Although boards are under pressure to make changes, it is still not clear whether the changes they have made have been aggressive enough to placate shareholders. These are exactly the same issues facing UK boards," she added.

The studies have come at the same time as a report from HR consultancy Hewitt Associates has argued that the global financial mess will, if anything, focus attention even more on the "pay for performance" model that has become such an important feature of executive remuneration.

The current state of the economy will mean Europe's top companies will need to review the design of their senior directors' reward packages, particularly their cash and share-based incentives, it argued.

While the expectations of top talent will still need to be taken into account, these will need to be balanced by shareholder, governmental and public concerns.

There was a surprising degree of similarity on the level of reward received by European directors, suggesting the top companies were increasingly drawing their leadership from the same talent pool, Hewitt argued.

However, the structure of incentive pay currently used in continental Europe would probably need to be updated to take more account of investor best practice expectations and the new economic reality, it added.

Rob Burdett, principal consultant with Hewitt New Bridge Street in the UK, said: "Executive remuneration has been the subject of much debate in recent months in the light of greater scrutiny and high profile interest.

"What is now clear is that many companies are reviewing their executive reward structures to ensure they meet the demands of the current environment," he added.

The survey of directors' remuneration at Europe's top 100 companies found an increasing pay-for-performance culture, with around three-quarters of total reward now delivered by short- and long-term incentives.

"It will be interesting to see the level of bonus payouts in the coming year in light of the current recession. With levels of fixed pay unlikely to increase much (if at all) in 2009, the emphasis is firmly thrown onto performance-related pay," argued Burdett.

"While some will argue that bonuses are hard to justify in a recessionary environment, we believe it's important that companies maintain incentive arrangements linked to clear objectives," he added.

"But companies have to remain sensitive to shareholders' views on determining the level of performance that triggers the payment of a bonus. The targets must not encourage undue risk-taking, which can be addressed by bonus deferral and claw-back provisions, both of which remain very uncommon in mainland Europe," he concluded.

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