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Lowering the Bar on Performance
The emphasis on retaining high performers apparently convinced many companies to change their executive-compensation programs to reduce performance targets during the economic downturn. In those companies, compensation remained about the same as the previous year. Another analysis, however, found what seems to be a trend toward declining pay.
While findings from recent surveys deliver a somewhat mixed view on exactly how and why executive compensation unfolded in 2009, this much is clear: The teetering economy over the past two years has caused the scrutiny on executive comp to be even more acute. That intensifying focus offers an excellent chance for HR executives to have a serious impact in 2010 and beyond -- but only if they step up and take advantage of the opportunity, experts say. Despite a year of intense shareholder, governmental and public pressure, total CEO pay has remained relatively flat -- declining a mere 0.9 percent, according to the 2009Wall Street Journal/Hay Group CEO Compensation Study. "During a year when compensation committees faced unprecedented shareholder, governmental and public pressure, many expected to see landmark changes in the way CEOs were compensated in 2009," says Irv Becker, national practice leader of the U.S. Executive Compensation Practice at Hay Group. "Instead, we found many compensation committees were focused on retention of their top talent, putting significant long-term value back on the table for executives and lowering the bar on annual performance targets. The combination of the two made pay programs less performance-based. "Clearly, from HR's perspective, the weighting of retention -- an HR issue -- in overall executive-compensation packages became more significant," he says. Becker adds that, as some companies in the study move away from three-year performance plans (he cited McGraw Hill as an example) and shift to annual performance metrics for their long-term incentive plans, HR should be much more involved in redesigning these plans, to help deal with any interim periods of economic uncertainty. The results were slightly different according to Equilar, a compensation research firm in Redwood Shores, Calif., that recently prepared a report for The New York Times. Analyzing the pay of chief executives at 199 public companies with revenue of at least $5.78 billion (that filed proxies by March 26), Equilar found the median pay package declined by 13 percent in 2009, to $7.7 million. Equilar's report adds that it is the second consecutive year CEO pay declined. Los Angeles-based Robin Ferracone, founder and executive chair at Farient Advisors, an independent executive compensation consulting firm, says the power HR executives can yield in the area of executive compensation varies tremendously from company to company, but they must try to influence the process given today's realities. "Helping to decide what a CEO should be paid can be a politically dangerous area for an HR executive," says Ferracone, whose book, "Fair Pay, Fair Play: Aligning Executive Performance and Pay," was released this month. "But, they can help pick a reliable comp consultant and help manage that consultant. And, HR can help collect the data needed to come up with a good CEO pay package." She adds that she is seeing more and more compensation committees turning to HR executives for advice in setting CEO pay. "HR executives need an executive-compensation process that facilitates communication with the comp committee," she says. "It's critical." Another area where HR executives can play a key role is by directly providing the CEO with advice on the executive-compensation issue itself. "I've seen very good HR people counsel the CEO on how to behave in this new environment," she says. "A CEO can get very vociferous, but what the HR executive can do is help coach the CEO about when to be in the discussion and when not to be. They need to know it's not just about them anymore." Finally, Ferracone adds, the top HR executive can and should play a role in helping define the compensation-planning strategy across the entire organization. "When it comes to compensation, a culture of alignment is important, as many companies have issues around misalignment, especially regarding executive compensation," she says. "It should be when performance is good, people are paid well. "HR can hold up a mirror to the CEO, let them know they are behaving inconsistently," she adds. "If they are not setting a very good example, HR needs to make that known to the CEO." In the end, Ferracone says excessive executive pay is not the real problem; rather, it comes down to when pay is not aligned with performance. And HR's role must be to accept that pay has not been aligned with performance and take steps to fix this problem. "HR can't take the easy way out and return to how things used to be," she says. Dan Laddin, a partner at Compensation Advisory Partners, an independent compensation consulting firm in New York, believes HR is gaining credibility with senior executives as well as with compensation committees. "Everyone is trying to manage costs and retain top talent," Laddin says. "HR needs to make sure the company is targeting long- and short-term incentives, and identifying high performers and top talent people to allocate those dollars appropriately on the highest levels." Also, he says, HR needs to play a key role in helping identify the next level of management via succession planning, mostly how to reward and drive that process. "The magnitude of the economic crisis increased the level of scrutiny of executive-compensation practices over the past two years to unprecedented levels," Laddin adds. "The actions we have seen companies take in 2009 have been greatly affected by the environment. We believe that both senior leaders within companies and compensation committees are supporting a new level of responsibility and accountability." Other key Wall Street Journal/Hay Group Study findings include: * CEO perquisites declined -- 22 percent of top U.S. companies reduced their perqs, with the most decline seen in tax gross-ups on perqs, use of company car and spousal travel. * Shareholder return rallied -- the median company showed a 21.5 percent one year total shareholder return despite net profits declining 5 percent. * Industry performance varied -- Technology companies saw the sharpest decline in pay, while Consumer Services companies soared. Financial Services companies increased their net income by 20.2 percent, but pay remained flat. * Stock options re-emerged as the dominant long-term incentive vehicle in 2009, with 70 percent of companies using them (up from 63 percent in 2008). Hay Group's Becker says that, looking forward, it's clear that shareholder empowerment and the role of risk in compensation will impact the way compensation committees evaluate executive pay. "As companies prepare for 2010 and beyond, it's critical that they learn what really matters to shareholders, and engage them in a productive dialogue about these executive pay issues," he says. "HR should be part of that discussion from an internal perspective."
April 23, 2010 Copyright 2010© LRP Publications |
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