Bonus curbs coming to a boardroom near you

Feb 05 2009 by Nic Paton Print This Article

It's a bold move that speaks volumes, and President Barack Obama's ruling yesterday to put a $500,000 cap on the pay of senior executives at companies that have been bailed out with public money could potentially force firms on both sides of the Atlantic to rethink their executive pay packages.

It is yet another sign of the ratcheting up of the pressure on CEO and executive remuneration, with UK business secretary Peter Mandelson also warning beleaguered Royal Bank of Scotland, now 70 per cent owned by the UK government, against awarding its traders and bosses "exorbitant" bonuses.

In principle, Obama's new rules only affect a handful of U.S firms, particularly the nation's battered financial institutions – but all the signs are that it may just be a first move by the new administration in wider efforts to clamp down on executive pay, argue Washington observers.

Alexander Cwirko-Godycki, research manager for executive compensation research firm Equilar, told news channel CNN that Obama's move was a sign of the sharply changed mood in America over executive reward and remuneration.

"There's a total lack of trust on Main Street for Wall Street," he told the news organisation.

"The arguments against curbs don't make sense any longer. My friends will bring up the issue even before I do. Opinion has been galvanized," added Robert McCormick, chief policy officer for Glass Lewis & Co, a research firm advising institutional investors.

Nell Minow, co-founder of shareholder rights group The Corporate Library, urged Obama to go even further and bring in rules on the election of corporate directors to help rein in pay.

"The only thing that will make any difference is the ability to for shareholders to get rid of bad directors who vote for these bad pay packages. That way, once in a while, a director is going to say, 'Gee, I could vote for this pay plan, but maybe the shareholders wouldn't like it'," she said.

If financial firms are forced to cut pay, there also be little excuse for companies in other sectors not to follow suit, she argued.

In the UK, Lord Mandelson urged RBS to "be mindful" of the how awarding large bonuses would look to the public in the present climate.

In an interview, he said: "Of course you have got to do all you can to recruit the best people and keep the best people in place – there is a huge job on our plates. On the other hand the banks have got to be sensitive to public opinion and I think they need to think about what is the best way forward."

The BBC's business editor Robert Peston has also suggested Obama's move will put pressure on the UK government to introduce a similar cap on British banks that have received state support.

Yet, away from the political fray and headlines of salary freezes, evidence is emerging that, in fact, many employees are still likely to get pay rises this year, albeit relatively modest ones.

According to a survey of more than 1,000 U.S companies by HR organisation WorldatWork the average salary increase this year will be 3.1 per cent, down from the 3.9 per cent reported in April last year.

Intriguing, just 10 per cent of workers appeared to be facing a salary freeze and nearly eight out of 10 should still expect to receive a base pay raise, it estimated.

"There is a silver lining in this dark economic cloud," said Anne C Ruddy, president of WorldatWork. "Employers are committed to rewarding employees."

Nevertheless, half the firms polled were made changes to their 2009 projected salary budget increases, with more than nine out of 10 lowering their projections, on average by 1.6 per cent.

Among those reducing their salary budget increases, between a fifth and a third were cutting salary increase budgets to zero.

And, when it came to increases for managers and executives, nearly 17 per cent reported zero salary budget increases in December, compared with three per cent in April 2008.

"This sends an important signal to employees that leaders are doing their part and sharing the pain brought on by these difficult times," stressed Rudddy.

At the same time, research by HR consultancy Hewitt Associates has painted a landscape of continuing layoffs, hiring freezes and bonus reductions around the globe.

The majority of organisations in every region of the world were responding to the global downturn by making across-the-board cuts to their 2009 salary increase budgets, it argued.

Many were also implementing layoffs, pay freezes, hiring freezes and reducing bonus budgets, yet the actual activity varied markedly from region to region.

The poll of more than 2,000 companies in 40 countries and representing more than 25 million employees found more than two thirds of European companies were making changes, followed by Latin America (63 per cent), Asia-Pacific (58 per cent) and the U.S (half).

Of those, it was employees in Asia-Pacific who were seeing the most drastic cuts to their pay raises this year, with increases being cut by between 1.7 per cent to 5.2 per cent.

Workers in Europe could expect to see average pay increases of 4.2 per cent this year, down 0.9 per cent from original projections and in the U.S – where original salary increases for 2009 were already dismal – workers would see the lowest pay raises in three decades, with average increases of three per cent, down 0.7 per cent from projections made earlier in 2008, said Hewitt.

In Europe, nearly seven out of 10 firms were also planning layoffs, and nearly two-thirds were contemplating hiring freezes.

In Latin American, two-thirds were considering hiring freezes. On the other hand, companies in Asia-Pacific and the U.S were focusing more on reducing variable pay budgets or performance-based awards.

"With few signs that the current economic situation will improve in the next nine to 12 months, making across-the-board cuts to salary increases and/or reducing headcount are some of the quickest and easiest ways to lower overall costs," pointed out Peter Acker, North American leader, global rewards at Hewitt Associates.

"But we encourage companies to think through the longer-term implications. While some reductions may be unavoidable, organizations need to use this time as an opportunity to assess all of their benefits and rewards programs.

"Are these programs aligned with their business strategy? Are they competitive? Do they support investments in certain markets or segments where growth is anticipated? At that point, companies can be smarter about where cost reductions can and should be made, and ultimately, they will be the ones best positioned to succeed once the economy improves," he added.