Pity the chair of your board's compensation committee, for in recent years it has been a thankless job. Economic and market turmoil have seeded shareholder frustration and public outrage. Provisions of the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act are only the latest in a series of legislative/regulatory events designed to bolster U.S. Securities and Exchange Commission disclosure requirements and increase the transparency of the executive pay decision-making process.
One of the most notable outcomes of Dodd-Frank is that publicly traded companies must now submit their proxy filings' executive compensation disclosures to a non-binding shareholder advisory vote, which is known as "Say On Pay."
In sum, the SEC, investors and the general public are all demanding more information relating to the links between executive pay and company performance. At the same time, various institutional shareholders and proxy advisory firms have expanded their lists of so-called "poor pay practices" that may lead to a vote against a company's say on pay resolution or votes against the election of compensation committee members held accountable for these practices.
A recent survey conducted by Pearl Myer & Partners, on Compensation Planning: Looking Ahead to Executive Pay Practices in 2011, offers an in-depth preview of how executive pay decision-makers are responding to these latest challenges. Participants from 279 companies, ranging from Fortune 50 members to emerging high-growth businesses, provide insights into how they plan to structure and oversee pay programs this year for their chief executives and direct reports.
Perhaps the clearest finding of the survey is that compensation committees are more rigorously reviewing their oversight of executive incentive practices, including performance metric selection and goal-setting. After all, ensuring proper executive pay for performance alignment may be the committee's most important responsibility. This is an area where input from financial executives will be essential.
What 2011 Holds For Pay Levels
Nearly 27 percent of the survey participants said they either froze or decreased their executive salaries in Fiscal 2010-not surgiven the widespread hiring freezes or layoffs that have characterized the past three years. Anticipated increases for FY 2011 are modest, with the majority of respondents anticipating a 2-percent to 4-percent-bump, which is below the historic 4-percent annual increases of the past two decades.
As for annual cash incentives--the bonus payments typically tied to achievement against prior-year goals--95 percent of participants expect a payout for this year's performance. Payout levels are generally expected to be close to plan targets, with only 11 percent of participants expecting payouts above 125 percent of target, and 12 percent expecting payouts below 75 percent of target.
In general, payout levels will be somewhat higher than...