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Companies to Curb Executive Bonuses, Stock Awards, according to new Pearl Meyer & Partners survey
Market downturn will dramatically impact executive pay decisions across industries, according to new Pearl Meyer & Partners survey

NEW YORK – November 18, 2008 — Companies expect annual bonus and stock-based awards for executives to decline in response to the troubled economy, according to a new survey of more than 400 board members, executives and human resources professionals.

Nearly 9 out of 10 respondents said market turmoil will affect their decisions about executive compensation during the next six months, with nearly one in five predicting the impact will be “significant,” according to Executive Pay in the New Economy, an online survey conducted by independent compensation consultancy Pearl Meyer & Partners in early November.

Survey participants were asked to comment on their year-end pay decisions – the awards provided for performance in 2008 – and provide insight into their compensation planning for 2009. In addition to the declines in performance-based pay, half of respondents expect salary growth to be lower in 2009, with nearly 18% saying their companies are “strongly considering” a salary freeze.

“It’s appropriate that variable components of pay such as annual bonus awards and stock grants are being put at risk in executive pay programs – that is how pay for performance is supposed to work,” said David Swinford, president and CEO of Pearl Meyer & Partners. “The open question is whether the reductions will be in line with the expectations of shareholders who are feeling the pain in their own portfolios.”

Some companies question whether performance targets may have been set too low.

The survey also found that 36% of respondents said they might consider paying a year-end bonus below formula—in other words, exercising their discretion to provide a payout that is less than what the executive would have “earned” based on the plan’s stated objectives.

“What’s interesting is that while bonuses normally are smaller when performance targets are missed, the strong interest in exercising negative discretion in this problematic year suggests companies may want to correct a disconnect in their goal-setting process and better align rewards with market performance,” Swinford noted.

Long-term incentives to fall

Slightly over half of respondents anticipate a decline in the value of this year’s long-term incentive awards (the stock option and restricted share grants that comprise the bulk of executive compensation in many industries), with 23% saying values will be “considerably lower.” Noted Swinford, “When companies decide not to increase the size of stock awards to compensate for depressed share values, it means executives do not benefit unless – and until – they succeed in boosting the share price.”

Severance pay likely to decline

About 1 in 5 respondents expect to revise their companies’ severance or change-in-control arrangements during the next 12 months. By a 3:1 ratio, respondents anticipate decreased payouts as compared to higher payouts. “Companies have been working to eliminate unfair or excessive payouts,” said Swinford. “But such arrangements are usually so complex, with payouts dependent on multiple factors such as future share price and years of service, so companies have to very carefully consider the ramifications of any changes.”

Boards sound tougher on pay

Board members were more likely than other respondents to predict lower base salary increases (57% vs. 49%, respectively); to be considering a salary freeze (41% vs. 36%), and to expect changes to their executive severance programs (32% vs. 17%).

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About the survey

Pearl Meyer & Partners conducted the Executive Pay in the New Economy survey from late October to early November 2008 to determine what executive pay program modifications were being contemplated by boards, executives, and human resource professionals in light of recent market turmoil. The 410 respondents to the survey represented 371 organizations across a broad range of industries and ownership structures and included 80 “outside directors” and 330 “employees of the firm.”

About Pearl Meyer & Partners
Since 1989, Pearl Meyer & Partners (www.pearlmeyer.com) has served as a trusted independent advisor to Boards and their senior management in the areas of compensation governance, strategy and program design. The firm provides comprehensive solutions to complex compensation challenges for companies ranging from the Fortune 500 to not-for-profits as well as emerging high-growth companies. These organizations rely on Pearl Meyer & Partners to develop programs that align rewards with long-term business goals to create value for all stakeholders: shareholders, executives, and employees. The firm maintains offices in New York, Atlanta, Boston, Charlotte, Chicago, Houston and Los Angeles.

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