Faced with increasing pressure from regulators and shareholders to manage costs and align pay with performance, companies are revamping their executive long-term incentive awards, according to research by human resources services firm Hewitt Associates.
A Hewitt survey of 117 U.S. companies with a median market cap of more than $11 billion revealed that 71 percent are revising, or plan to revise, their long-term incentive program design in anticipation of mandatory stock option expensing. Under Financial Accounting Standards Board rules, public companies are required to expense options by the start of their 2006 fiscal year.
Many organizations are shifting portion of their long-term incentive mix from stock options to restricted stock (43 percent) and performance-based shares/units (33 percent), while 35 percent are limiting the number of employees eligible for long-term incentive plans, Hewitt reported.
Hewitt Associates senior consultant Tracy Davis said the trend toward shifting more executive pay to performance-based equity is expected to have "a major impact on executive earning potential, as a growing portion of their pay will be determined by their success in achieving long-term business goals and how well they meet shareholder expectations."
Hewitt's study also showed that many companies (42 percent) aren't fully replacing stock-option grant values as they move to other forms of equity incentives. Roughly 40 percent of companies are using a 3-to-1 value ratio when converting to restricted stock, and a 4-to-1 ratio when converting to performance-based shares, while only a minority are fully replacing stock-option values in shifting to forms of incentive compensation.
Hewitt said 2005 executive base pay increases are consistent with last year, with more than 70 percent of companies awarding increases of less than 4 percent (median of 3.5 percent). As for bonuses, 68 percent of companies are awarding at or above target this year (for 2004 performance), compared with 46 percent last year. Specifically, 47 percent of organizations are paying between 100 percent and 149 percent, and 21 percent of companies are paying 150 percent or more of targeted bonuses.
