While many employers are expecting declining shareholder values in 2011, most still plan to pay executive bonuses that match or go above 2010's awards and fund bonuses at or above target levels, according to a survey by Towers Watson, a global professional services company.
The survey, which includes interviews from 265 mid-size and large organizations, reveals that 61 percent of respondents believe their total shareholder return for 2011 will fall or remain stagnant while they expect their 2011 annual bonus pools to be as large or larger than those for 2010. Another 58 percent of respondents anticipate funding their annual incentive plans at or above target levels based on their companies' year-to-date performance, and 48 percent of respondents say long-term incentive plans that relate to explicit performance conditions are to be funded at a minimum of target levels based on year-to-date performance.
"Given that many companies have seen strong financial results this year, it's no surprise that the majority of companies will fund their incentive pools at or above target levels," says Doug Friske, global head of executive compensation consulting at Towers Watson. "However, for companies that must submit their pay programs to a shareholder vote, the prospect of above-target incentive awards combined with shareholder losses could pose complications and communication challenges as they head into the 2012 proxy season."
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Most companies plan to offer the same incentive plan measures and designs during the upcoming performance cycle, the survey finds, and the percentage of compensation committees using discretion to supersede their executive incentive plan formulas has fallen from 35 percent in 2008 to only 13 percent in 2011. Of the respondents, one in four plans to alter the design of their long-term incentive plans for 2012. Most expect to increase the use of performance-based restricted stock and restricted stock and unit grants.
"In the say-on-pay world, the potential for real or perceived disconnects between executive rewards and shareholder value creation puts an even greater premium on proper incentive design, effective executive compensation disclosures and overall shareholder engagement efforts," Friske says. "The complexity of today's executive incentives, combined with the fact that the timing of incentive payouts and performance can vary between different forms of pay, really puts companies under the gun to make sure they have a clear and compelling rationale behind their programs."
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