Despite many companies in North America anticipating a decline in shareholder value in 2011, a majority expect to pay executive bonuses that are as large as or larger than last year’s awards. Additionally, the majority of companies plan to fund this year’s bonuses at or above target levels, reflecting strong operating results, according to a survey by Towers Watson, a global professional services company.
The Towers Watson survey of 265 midsize and large organizations found 61% expect their total shareholder return for 2011 to decline or remain flat. Meantime, the same number (61%) expect their annual bonus pools for 2011 to be as large or larger than those for 2010. Additionally, 58% expect to fund their annual incentive plans at or above target levels based on their companies’ year-to-date performance. Nearly half (48%) of respondents also expect long-term incentive plans that are tied to explicit performance conditions to be funded at or above 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,” said 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.”Other findings from the survey include:
• The percentage of compensation committees expected to exercise discretion to override their executive incentive plan formulas has declined sharply from 35% three years ago to only 13% this year.
• Most companies expect to keep the same incentive plan measures and designs for the next performance cycle.
• One in four companies are planning to change the design of their long-term incentive plans for 2012, with the vast majority of those increasing the use of performance-based restricted stock and restricted stock/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. 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,” said Friske.
About the Survey
The Towers Watson Executive Pay Flash Survey was conducted online in the second half of October 2011 and is based on responses from 265 organizations in North America, primarily midsize and large publicly traded U.S. companies.