Don't rely on your recession veterans

Nov 20 2008 by Nic Paton Print This Article

They are the few who have "been there, done that" when it comes to trading through a recession.

Yet the downturn is likely to lead to an exodus of hugely valuable top executives, new British research has suggested, as top-tier managers decide they have had enough and don't want to be bothered struggling through another slump.

The research by consultancy Watson Wyatt has suggested that, if top executives see no prospect of a payout from their incentive plans for several years, many may opt either to take early retirement or simply choose other, less frenetic careers.

With nearly a third of FTSE-100 chief executives and more than a quarter of FTSE-100 executive directors aged over 55 this could lead to a serious exodus from some of Britain's top companies, it has argued.

"The economic world has changed enormously in the last few months and even companies with sound business prospects face a long, hard haul back to where their share price was in 2007," said Sue Bartlett, a senior reward consultant at Watson Wyatt.

"The prospect facing executives is of several years of working much harder for far less reward. Some of the most 'recession-tested' and experienced hands may be tempted to call it a day just when shareholders need them most. Companies need to think carefully how to avoid this affecting their ability to recover quickly," she added.

While shareholders had suffered, it needed to be remembered that many executives also had a large part of their personal wealth invested in shares in their company.

"This is a big concentration of risk – their career, possibly their pension, their personal reputation and a big chunk of their personal savings all ride on the fortunes of the company," said Bartlett.

"This is very different from most shareholders who are free to switch in an out of a particular share and for whom it usually represents only a small part of a portfolio or fund," she added.

In fact, according to Watson Wyatt, many senior executives have effectively already been working for nothing over the past year.

For example, Watson Wyatt's Executive Reward Survey this year found that 42 per cent of participating companies required their chief executives to hold 200 per cent of their salary in the form of shares.

"We all agree that the interests of executives should be aligned with shareholders, that pay should be linked to performance and that avoiding 'windfall' payments for executives have to be top priorities," said Bartlett.

"But unless pay packages are structured such that senior executives can see the potential reward for their efforts to steer a path through the current downturn, they may decide their best interests lie elsewhere," she added.

"If you are an executive with your own money tied up in shares to the value of twice your salary and you've seen the share price halve, you've effectively already been working for no salary this year," she continued.

"Who in this position wouldn't start wondering if it is worth sticking around to fight through what could be a long recession?"

Just as the economic outlook for next year was almost universally grim around the world, so too was the pay outlook for senior executives.

"Our clients tell us that for 2009 there may be base pay freezes, no bonus payouts in respect of 2008, share awards that will not vest while share ownership requirements mean that executives have lost significant amounts of their own money," Sue Bartlett.

"Where a company has been caught in the economic crosswind but is otherwise strong, it needs a stable management team.

"There is no room for underperformers but in designing executive reward packages for recessionary times, a balance needs to be struck such that the best executives are retained and motivated to produce relative strong performance," she added.

The executive reward survey also suggested that salary increases for executives in 2008 were slightly lower than in 2007 and that companies were predicting lower increases still for 2009.

The number of companies offering final-salary pensions to newly recruited executives had also continued to decrease.

Just 18 per cent of companies in the survey said they would offer a new chief executive a final-salary pension.

Where cash was offered in place of a pension, the typical rate for main board directors was between 20 and 25 per cent of salary in FTSE-100 companies and between 15 and 20 per cent of salary in FTSE-250 companies, it added.

  Categories: