Shareholder activists have been grousing about executive pay and benefits for years but are getting results now. “Populist pressures to limit executive pay are taking a toll,” says Scott Olsen, a Principal in the HR Services Group at PricewaterhouseCoopers LLP in New York. Executive plans have been under scrutiny for some time but, because of the financial crisis, they are under more scrutiny than ever, and shareholders are flexing their muscle, says James Scannella, a Senior Consultant with Towers Watson in New York.
Public and shareholder pressure now has led to executive plan redesigns. In the last 24 months, one in three Fortune 500 companies has made changes to executive plans, says Frederick.
When changes are made, there have been material changes in the objectives of these programs. “Executive plans are still highly relevant, but play a different role than three years ago,” says Doug Frederick, the Head of Mercer’s Executive Benefits Group in Louisville, Kentucky. For one thing, companies now are creating executive benefits programs that are more “sticky” and give shareholders more rights, says Roberts. Program redesigns also have led to the overall levels of executive benefits going down, says Frederick. Executive benefits had been on a continual upslope for more than a decade, and that seems to have stopped in 2008 to 2009, confirms Scannella.
One notable trend in the redesigns is to make executive benefits be more restorative and less supplemental, says Frederick. Firms still are providing executives with plans that compensate for Internal Revenue Code qualified plan limits, he says, but true SERPs, where executives get benefits above and beyond the rank and file, are less popular. In 2009 and 2010, says Scannella, the trend was for companies to freeze or terminate SERPs.
Additionally, as firms freeze and terminate qualified defined benefit plans, they are doing so for executives as well, adds Frederick. Eight out of 10 Fortune 500 plans that changed their qualified defined benefit plan changed the executive defined benefit plan as well, he says.
There also have been a lot of changes in the way equity grants are made to executives, says David Roberts, Head of Equity Plan Services at Bank of America Merrill Lynch in Scottsdale, Arizona. Previously, stock options and restrictive stock were the types of equity most often granted. The new trend is to grant restricted units tied to a performance factor, he says, such as stock price growth in relation to peers. Equity grants also have longer vesting periods, moving from a typical three-year period to one that is now five to seven years long.
Perhaps one of the biggest changes has been to the methodology for determining executive pay and benefits. Setting executive compensation only in relation to peers has lost favor. Previously, says Olsen, the primary driver of executive pay packages was peer group/benchmarking. This, however, was criticized as creating the so-called “Lake Wobegon” effect of spiraling executive compensation. Now, peer group/benchmarking is lower down in overall consideration, says Olsen. The new way, he says, is to look at pay and benefits more holistically and determine how a compensation program fits the overall goals of the company.
Historically, agrees Frederick, the primary analysis was whether a package was defensible in relation to peer group or industry pay. Now, he says, other factors are being heavily considered, including whether the compensation is internally defensible.