However, approximately three in 10 companies are raising performance goals relative to this year's actual performance (29 percent) and changing metrics (31 percent) in their annual incentive plans. Four in 10 (39 percent) of companies have changed or plan to change long-term incentive vehicles. Of these companies, 42 percent plan to put more emphasis on performance-based shares and 25 percent on performance cash plans. The Watson Wyatt survey was conducted in late September and includes responses from HR and compensation executives at 187 companies.
"Companies have moved beyond the short-term frenetic activity that we saw at the beginning of the year," said Andrew Goldstein, North American co-leader of executive compensation consulting at Watson Wyatt. "Now, companies are looking at how they can best address more long-term concerns with structural changes to pay programs."
According to the survey, 94 percent of companies expect more scrutiny of executive pay in the next two years as a result of new legislation, Securities and Exchange Commission regulations and public pressures, with almost three-quarters (72 percent) expecting the relationship between pay and performance to improve. Sixty percent of companies reported having little concern regarding possible say-on-pay requirements. The majority of respondents appear to be already taking steps by improving their Compensation Discussion and Analysis (CD&A) to explain pay program rationale and appropriateness to shareholders (70 percent) or identifying potential executive pay issues/concerns in advance (67 percent).
Almost half (42 percent) of companies are concerned about potential legislation assessing executive pay for "excessive risk." Most companies have taken action to address the issue of risk: 54 percent have or plan to add a formal risk assessment process, up from 30 percent in March; 50 percent have or plan to certify in the proxy that a risk assessment has been performed, up from 31 percent in our March survey.
"Companies recognize that changes to executive pay programs will be needed to stand up against growing criticism and increased pressure," said Ira Kay, global director of executive compensation consulting at Watson Wyatt. "However, this change will be a long-term process and one that will require companies to focus on strengthening performance-based incentives, balancing risk and rewards, and meeting proactively with key stakeholders to discuss their pay program rationale."
Other findings include:
- Only 12 percent plan to decrease their next fiscal year's long-term incentive (LTI) grant dollar value over this year's, compared with 33 percent in March. Almost half (45 percent) do not expect their LTI grant values to change.
- Companies report moderate-to-significant concern about caps on incentive compensation (53 percent), expanded CD&A disclosures below the top five (53 percent) and elimination of the 162(m) performance award exemption (53 percent).
- Nineteen percent of companies have eliminated their golden parachute tax gross-up provisions, and 44 percent of companies have or are considering claw back policies.
