Executive compensation management will have a greater emphasis on performance measures

by on June 30, 2009 · 0 Comment POSTED IN: HR Info Center

Performance based trends in executive compensation management

As we move through this tough economic period that we will have modest compensation increases on base salary. And we will get increased incentive opportunities. Executive compensation management going to be more and more tied to performance.

With disclosure, the SEC is coming back to all the public companies who did not disclose their performance measures and saying disclose them or tell us how you meet that competitive disadvantage exclusion.

Performance measures in executive compensation management
Back to the baseball analogy, if everybody in a certain industry and size is going to say return on equity, sales growth, EPS growth are the drivers. Then we can sit there and rank those out and tell everyone who the top 10% is and who the bottom 10% is.

And I think what that’s going to do is the board is going to then feel very comfortable rewarding the top executive performers at the top pay rates. And we will see an overall escalation.

Transparency in executive compensation management will lead to probably some short-term takeaways. Companies will have some short-term pain. But long-term, it’ll be a benefit for everybody. And I think that’s what we’ll still see. But we’re still in the first two or three years of short-term pay.

The continued focus on pay for performance in compensation management.
The focus on pay for performance and making sure that that’s clearly laid out before the year starts. You know, 409(a) requires that. The proxy disclosure requires that. 162(m) requires that. And the board is now focused on it because obviously, it impacts the governance index of the company.

The board wants to be very clear on when they can pay a bonus in the executive compensation management structure and when they can’t. The discretionary bonus days of the top people I think they’re pretty much over.

Private companies and executive compensation management
Greater focus on the regulatory environment accounting rules, disclosure, corporate governance, it trickles down to the private companies. So even if you’re not a public company and you’re a private company, you need to be aware of this. You need to plan for it because it’s going to impact your organization.

I think as you look at long-term incentives and how to retain the key people, I think it’s very important that you look at even if your options are under water, do you re-price? Do you offer deferred compensation to complement that?

What we’re telling companies now is if you’re not going to do something with your options or your long-term incentive and that’s you’re only method of retention, your executives will reprice their own executive compensation management options. In other words, with the market being down, they’ll walk across to your competitor. They’ll get a new option grant. They’ll be repriced at today’s value. So if you don’t do it, they’re going to do it for you.

Edited remarks from the Rapid Learning Institute webinar: “Executive Compensation Trends: New Benchmarks & Changing Regulations” by Edward Rataj and Kevin Nussbaum

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