Amid changing realities pursuant to the global financial crisis, executive pay programmes of US companies are getting affected and their pay opportunity is expected to decline over the next two years, a survey says.
According to leading global consulting firm Watson Wyatt, more than a third (34 per cent) of directors said their companies had already reduced salary, target bonus and/or long-term incentive award levels, while, six per cent plan to make those changes in the next six months and another 48 per cent are considering making them.
"Nearly two-thirds (63 per cent) of outside directors said they believe American companies should modify their executive compensation programs to adapt to new economic realities," the survey further pointed out.
Commenting on the findings of the study, Watson Wyatt global director of executive compensation consulting, Ira Kay, said, "Shareholders and the general public will support that directors are looking to change their executive pay programs to reflect the economic crisis. We are confident that boards will continue to hold management directly accountable for their company's performance."
Watson Wyatt's survey was conducted in March and April 2009 and includes responses from 85 directors. "Directors face an increasingly difficult challenge against the backdrop of a very tough economy and intense outside scrutiny," Watson Wyatt North American co-leader of executive compensation consulting Andrew Goldstein said.
For incentive pay programmes to be effective, they must be motivational and reward executives well for delivering strong performances. At the same time, compensation programmes must satisfy shareholders by safeguarding against pay for failure and excessive risk-taking.
"The onus is on directors and management to achieve that balance," Goldstein added.
Most of the directors surveyed are slightly concerned about retention of high-performing executives and 70 per cent of them expect executive pay opportunity to decline over the next two years.
The survey also found that directors do not expect legislation to have a significant impact on executive pay for performance.
Almost half of the directors noted that their companies have already made or are planning to make changes to their long-term incentive plan vehicles. Among these firms, 53 per cent plan to put more emphasis on performance-based shares, and 26 per cent plan to focus on performance-based cash plans, the report said.
Thirty per cent of directors expect firms to change their performance metrics around annual bonuses this fiscal and 27 per cent expect to change their performance metrics around long-term performance plans, Watson Wyatt added.