After two years of declining compensation, weary U.S. executives should be thrilled by projections of a modest increase in their average pay for 2010. But with shareholders, legislators and media watchdogs fixated on executive paychecks and layers of new regulations on the horizon, companies are still striving to fine tune compensation programs and strengthen the link between executive pay and performance.
A June flash survey of 251 companies by Towers Watson revealed that few were prepared to submit their executive pay practices to a shareholder vote as mandated by the new financial services reform bill. Although companies are waiting for further clarification on several provisions in the Dodd-Frank bill, more than two-thirds were taking action by proceeding with changes to executives’ annual incentive plans, and more than half were altering their long-term performance plans to ensure their programs do in fact align with performance and reward the right results.
“Now that the economy is improving, retention of key executives is re-emerging as a concern,” says Ann Costelloe, CFA, senior consultant for the Executive Pay Practice at Towers Watson. “Although preventing executive defections is a priority, companies must cautiously and thoughtfully alter compensation plans, given company goals and performance as well as the increase in regulations and scrutiny surrounding executive pay.”
Smart Business spoke with Costelloe about how companies are strengthening governance and addressing retention by altering their executive compensation programs.
What are the key regulations impacting executive pay?
The Dodd-Frank Act’s say-on-pay provision, among other things, requires public companies to fully disclose executive pay packages and conduct nonbinding shareholder approval votes at least once every three years, possibly beginning with the 2011 proxy season. Theoretically, shareholders could render a negative vote, making it imperative that companies proactively explain the rationale between the executives’ pay and the company’s performance and address shareholder concerns before they become issues.
Another key provision requires companies to disclose the median total compensation for employees and report the ratio of CEO-to-employee pay. While awaiting further clarification, it’s assumed that companies will need to substantiate higher ratios through better financial results or by demonstrating that their CEOs have greater experience, performance or capabilities than their peers.
