Executive Bonuses: Under a Cautious Eye

Executives are receiving higher bonuses so far this year, as the first proxies are filed and analyzed. The turbulent economy, however, has some companies restricting goals to one-year timeframes, while the new say-on-pay regulations are forcing companies to become more transparent -- and responsive to shareholder concerns.

Wednesday, April 6, 2011
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If recession represents the long winter of discontent for public companies and their investors, then spring, in the form of improving profits and overall financial performance, may mean larger bonuses for corporate executives in 2011.

Corporate profits have reached the highest level in more than a decade, reports Bloomberg News. While some remnants of the recession -- such as a high unemployment rate -- still linger, the S&P has trended upward as well. 

And some financial experts are cautiously optimistic that the trend in profit growth will continue throughout the year -- which is expected to mean a brighter outlook for an increase in executive bonuses as well.

If 2010 is an indication, bonuses should continue to rise, based upon compensation targets and company and industry performance. 

Hay Group, in its annual salary compensation study for the Wall Street Journal, reports that CEO bonuses at 50 major corporations jumped 30.5 percent in 2010, the largest increase since 2007.

Starbucks Corp., for example, rewarded its CEO, Howard Schultz with a $3.5 million bonus -- $2.5 million more than it paid to him the previous year. A company spokesman says Schultz met tough bonus goals, that the company saw a turnaround in sales and that profits more than doubled.

General Electric CEO Jeffrey Immelt earned a $4 million cash bonus for 2010, after forgoing a bonus the previous two years. 

Guiding Oshkosh Corp. to a rise in operating income netted Robert G. Bohn a $2.4 million bonus -- up from the $527,813 he received the previous year. 

"In '09, the country was still in a recession. Performance wasn't good," says Philadelphia-based Hay Group's Irv Becker, national practice leader of executive compensation. "Performance and bonuses got much better [in 2010]. We haven't seen that type of increase in a number of years."

Cash bonuses for executives may range from 50 percent of base salary to 100 percent of base salary. Some experts believe it could be even higher, perhaps as much as 150 percent of base salary.

Bonus compensation targets, of course, vary "by company and industry," says Michael Enos, managing director of Pearl Meyer & Partners, an executive compensation firm based in New York. "What companies will try to do is set a threshold performance level."

The newly implemented say-on-pay regulations -- which allow investors to vote on executive compensation -- have had an impact, experts say, although it's hard to see the extent of the impact since the first round of proxies prepared under that rule are just being filed.

"Boards are thinking more about what they do," says Paul Dorf, managing director of Compensation Resources Inc., a consulting firm in Upper Saddle River, N.J. "There is more responsiveness on the boards and the compensation committees. There are more checks and balances."

Enos says say-on-pay will promote both written communications and conversations with institutional shareholders, a belief concurred with in a recent Pearl Meyer & Partners study of 279 participants, Looking Ahead to Executive Practices in 2011, which finds the "executive pay decision-making process continues to grow more transparent." 

Investors are demanding more information relating to links between pay and performance, as well as detailed explanations of how compensation risk is managed, according to the study. There also is "downward pressure on executive perquisite programs and severance arrangements."

What's the forecast for 2011? While some compensation experts believe bonuses will continue to rise as corporate performance rises, it will depend on compensation targets put in place by boards of directors.

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Michael Sirkin, co-head of the Employee Benefits, Executive Compensation & ERISA Litigation Practice Center at New York law firm Proskauer, says it's too early to tell.

"It depends upon the economy and if performance stays up," he says.

In addition, because of fluctuations in the economy, some company boards are finding it difficult to set bonus targets, Sirkin says.


"It's very hard to pick criteria, so we're seeing one-year goals," he says. "Annual bonuses are based on what they are trying to achieve this year."

Despite the perceived improvement in the economy, the implementation of say-on-pay guidelines is prompting some companies to remain somewhat cautious in their bonus programs.

So far, shareholders have expressed their opposition to only four companies, with 91 percent of shareholder votes cast in favor of executive-bonus plans, according to a survey of 120 companies by New York-based Towers Watson.

One of the most visible rejections was at high-tech giant Hewlett Packard, where, despite the company's forecast for brighter financial results, voters narrowly voted against a bonus increase. 

"We do not know how [the company] will respond to that vote," says Laura Thatcher, head of executive practice in the Atlanta office of the Alston & Bird law firm.

HP officials have said they will carefully consider shareholder perspectives regarding executive-compensation matters and will take those views under advisement when making future decisions relating to executive compensation.

Thatcher says the "increase in shareholder power in pay decisions" is a healthy development that will result in "greater collaboration between pay and performance."

"We might see a trend toward less complex payment systems so they can be explained to shareholders," she says.




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