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Companies Tighten Link Between Exec Pay, Performance

July 29, 2010 — The declines in total executive compensation in 2008 and 2009 may be reversed this year in some companies, according to a Towers Watson survey on executive pay practices for 251 midsize and large U.S. companies. However, most U.S. companies remain focused on shareholder perceptions and the alignment between executive pay and business performance in the economic recovery. The survey results also show that few U.S. companies feel very well prepared to put their executive pay programs up to a "say on pay" shareholder vote.

Additional findings:

• Many companies expect modest increases in bonus funding and to make larger long-term incentive grants in 2010 than last year as a result of improving business conditions and the recovery in share prices. (See Figure 1.)

Figure 1: Trends in Annual and Long-Term Incentives, 2010 vs. 2009

• Following a couple of years of widespread salary freezes/reductions and smaller or nonexistent bonuses at many organizations, the vast majority of companies say they are likely to address executive retention issues at least to some extent as the recovery picks up speed.
• At the same time, most companies are taking a thoughtful approach to changing their executive pay programs. (See Figure 2.) Respondents say they are continuing — if not intensifying — efforts to fine-tune their executive compensation programs and governance processes, respond to shareholder concerns about certain pay practices, and ultimately strengthen the link between executive pay and performance. Also, two-thirds of the responding companies are making changes this year to their annual incentive plans, while slightly more than half are making changes to their long-term performance plans.

Figure 2: Changes in Annual Incentives and Long-Term Performance Plans

*Payout zone means the performance range (minimum and maximum) around the target goal to earn an award. An example payout zone around the target goal would be 80% at the minimum or threshold level, to 120% at the maximum performance level.

• Relatively few of the 251 companies responding to the survey believe they're fully prepared to put their pay practices to a shareholder vote, as new financial services reform law requires.

The Towers Watson Executive Compensation Flash Survey was conducted online between June 7, 2010 and June 14, 2010. A total of 251 U.S. organizations responded, primarily midsize and large companies spanning a broad range of industries. More than 80% of responding companies report annual revenues exceeding $1 billion, and more than 40% have more than $5 billion in annual revenue.

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