Executive Compensation Trends for 2010

Sunday, September 19, 2010

On Thursday, October 22, 2009, following the economic downturn in 2008 and US governmental intervention on behalf of several US companies. Included were, American International Group, Citigroup, Bank of America, Chrysler, General Motors, GMAC, and Chrysler, the Federal Reserve issued a number of rulings that would curtail executive compensation practices at employers who participated in the assistance from the Troubled Asset Relief Program (TARP). The changes affect a cash cap on annual compensation of $500,000 or more, the immediate vesting in stock options, and a limit on incentive stock compensation. The restrictions cover the five most executives and the other 20 highest paid employees at the TARP participating companies.

A Society for Human Resource Management (SHRM) report released on December 17, 2009, authored by Stephen Miller, and quoting from a survey by the compensation consultancy firm of Pearl Meyer & Partners, indicated that “… even companies that believe they are outperforming their peers project only modest salary increases. Survey respondents indicated that they were taking a cautious approach to design and payout levels of short-term and long-term incentive rewards.”

In a special report published by the New York Times on April 3, 2010 and authored by Devin Leonard, titled: “Executive Pay: A Special Report, Bargain Rates for a C.E.O.?”; it was disclosed that CEO pay declined by 13% in 2009, this followed a 9% drop in 2008. The article’s analysis was based on survey data provided by Equilar Inc., a research company involved in “benchmarking and tracking executive compensation, board compensation, equity grants and award policies and compensation practices.”

A July 2010 report from Towers Watson, an HR consulting firm, “companies remain focused on shareholder perceptions and the alignment between executive pay and business performance in the economic recovery.” According to the survey of 251 mid-sized and large US companies, Towers reports that as “Say or Pay” intensifies, few responding companies are ready to put their executive compensation practices to a vote by their shareholders.

Issues concerning executive compensation are not isolated to the US. In a 2010 report by the Hay Group, an HR consulting firm, Shine More Light on the issue: Top Executive Compensation in Europe 2010, Hay announced that executive “pay has reached a crossroads”. During the last two years, employers have been reluctant to take action on executive pay in spite of increased legislation and public concern over the issue. Hay goes on to say that “a fundamental rethink of executive pay“ must take place. Not too diffectient than what is being heard in the US.

Clearly, the recent two years have shown that organizations can expect greater involvement by governmental, shareholder, and public interest in the management of executive compensation. The public is coming to expect a higher degree of transparency in corporate dealings with top pay being only one of many area of concern.