Executives are facing moderate salary growth and tougher performance metrics in 2012, according to a recent survey from Pearl Meyer & Partners, an independent compensation consultant firm.
"Both the survey results and our client work point to a recognition by corporate leaders that linking pay to performance is absolutely essential – and that they're less than satisfied with their current programs in that regard," says Jim Heim, managing director of Pearl Meyer & Partners.
In fact, 42 percent of respondents plan to raise the performance expectations in 2012. Approximately one in five respondents anticipate modifying performance measures for 2012 in an effort to incorporate a metric that is more closely tied to creation of shareholder value.
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"This continues a trend of moving away from the traditional and simplistic approach to goal-setting, in which a few percentage points were just added to the previous year's performance," Heim says.
For 2012 salary growth, 59 percent of respondents anticipate a 2-4 percent salary increase while 10 percent believe they will see a salary freeze or decrease. There is also a decline in the amount of cash severance provided to executives for "without cause" terminations. According to the survey, 10 percent of respondents reduced contractual provisions in 2010, and 12 percent did so in 2011. Another 9 percent expect the same in 2012.
The survey also finds a similar drop in full "gross-up" payments that cover executives' taxes in response to a "parachute" severance following a leadership change. Although 35 percent of companies offer full gross-ups during fiscal 2009, only 18 percent plan to do the same in 2012.
Respondents believe the "need to validate alignment of relative pay and performance" is a top priority for 2012 compensation programs, followed by preparation for new SEC disclosure and governance requirements. Other new proxy disclosure rules include a provision that requires companies to address the link between CEO pay and company financial performance and compute the ratio of CEO pay to 'median' employee pay to shareholders.
"Compensation committees in 2012 will be spending significant time deciphering how their programs will appear through these new regulatory lenses – and adjusting what they don't like," Heim says.
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