Despite being severely affected by the current financial crisis, many Canadian companies expect to make less extensive changes to their executive pay programs than in 2009 in anticipation of an eventual economic recovery, according to a survey by Watson Wyatt, a leading global consulting firm. For those modifying the pay mix between base salaries, bonuses and long-term incentive (LTI) vehicles, the primary reason is to strengthen the link between executive pay and company performance.
All companies in the survey indicated they have been adversely affected by recent events in the economy and financial markets. Over 70 per cent have made some adjustments to their executive compensation programs in response to the economic downturn. Of those companies that made changes in 2009 close to half froze or reduced their executive base salaries, while one in three reduced or eliminated planned merit increases.
However, for 2010, only 22 per cent expect to make further adjustments to the economic downturn. Very few respondents (13 per cent) are planning to freeze or reduce executive base salaries. Watson Wyatt’s survey was conducted in August 2009 and includes responses from 53 companies.
“The fluctuating markets, together with the intense public spotlight on executive pay programs, took a toll on companies in 2009,” says Robert Levasseur, senior consultant of executive compensation at Watson Wyatt. “However, it is clear that companies are now beginning to see the light at the end of the tunnel, and their actions on executive pay programs planned for 2010 certainly reflect this optimistic view.”
In wake of the recent financial crisis, critics on executive compensation have put a lot of pressure on how companies structure their LTI programs. The survey shows that many companies are also revisiting their LTI vehicles. Of those companies that have an LTI plan, 28 per cent are changing their pay mix – mostly to put more emphasis on bonuses and performance shares, with less focus on stock options. Of companies that made changes to their pay mix, most did so to strengthen the link between executive pay and company performance. Risk reduction is not a determining factor when considering pay mix changes as few respondents believe the current executive compensation programs motivate excessive risk taking.
“Stock options are certainly under pressure during a recession where many organizations have seen their share price plunge by as much as 40 per cent. Many executives have been left with worthless underwater options and current valuations call for very high option grants which would be highly dilutive to un-accepting shareholders,” says Levasseur.
“The employee stock option plan will remain a staple in Canadian executive pay plans because it is the only long term incentive vehicle that offers a tax advantage to plan participants. However, as organizations regroup, it is not surprising to see a shift towards annual cash base incentives,” he notes.