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Earning It

Thursday, March 1, 2012
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The perceived pay gap between individuals at the top of the organizational chart and rank-and-file employees has never been wider, with a steadily increasing public outcry about executive compensation.

A recent study, however, finds that more companies are modifying incentive-based compensation programs to better align executive pay with company performance.

A survey of 190 organizations, ranging from Fortune 50 companies to emerging high-growth firms, found that more than two in five (42 percent) companies plan to raise their annual performance targets for 2012 incentive programs. 

"Heightened scrutiny of executive-pay programs has made many companies hesitant to set a performance target that is below the prior year's performance," says Jim Heim, managing director at New York-based Pearl Meyer & Partners.

Hopefully, he says, "what we're not seeing is the implementation of irrationally tough target-performance hurdles ... that are not linked to financial or operational progress."

A survey by New York-based Towers Watson finds, however, that nearly three in five (58 percent) of 265 mid-size and large corporations expect to fund their annual incentive plans at or above target levels, based on their companies' year-to-date performance -- even though 61 percent of them expect their total shareholder return for 2011 to decline or remain flat. Sixty-one percent of companies also expect 2011 bonus pools to be at least as large as in 2010.

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Irv Becker, national practice leader of executive compensation at Philadelphia-based The Hay Group, says "HR leaders will need to partner with the finance area to ensure that the board has significant information around the company's performance as well as the peer group and industry performance."

Heim notes that, "in the 'say-on-pay' era, it is increasingly important that pay decisions be defensible to both investors and employees ... ."

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