Companies Boosting Performance Measures for Incentive Programs

Mercer’s 2010 US Executive Compensation and Performance survey found one of every two organizations has introduced or plans to introduce new financial performance measures to their 2010 annual incentive program. One-third of organizations have introduced new financial measures to their annual incentive plans, while another 17% introduced non-financial measures, according to a news release.

In addition, the survey found one-fifth of organizations are allowing for more discretion with their annual incentive plan payouts, indicating continued uncertainty of the economic environment. Other changes include increasing the range of performance for corresponding payout levels and increasing threshold payout opportunities.

Payouts reflect the difficult year organizations faced in 2009. Almost half (48%) of companies expect their annual incentive plans to pay out below target or not at all. For manyorganizations, this is the second year with weak incentives. Just 5% of companies are planning for maximum payouts.

Long-term incentive (LTI) grant levels appear to be stabilizing. While slightly more than one-quarter (26%) of organizations reduced the dollar value of 2009 LTI grants relative to targets, most organizations (65%) awarded grants consistent with the value of historic targets. At this point in their planning, more than half (59%) of companies expect to deliver the same value in 2010 as 2009, while 24% are still finalizing their plans.

Of those organizations that reduced LTI grant values relative to targets in 2009, actions for 2010 are split between restoring cuts (27%), maintaining grant levels (31%), and being undecided about making adjustments (31%).

The Risk Factor

According to Mercer’s 2010 US Executive Compensation and Performance survey, assessing risk in incentive plans has become a hot issue over the past 18 months. More than one-third (36%) of organizations have completed or plan to complete such an assessment. Bruce Greenblatt, a partner with Mercer’s rewards consulting business, says the disclosure requirement related to risk in compensation policies and programs issued by the Securities and Exchange Commission (SEC) will prompt more organizations to conduct risk assessments.

"Companies will be validating whether their programs, particularly incentives, and pay program governance leads to inappropriate risk-taking. This will provoke them to assess whether the design of their plans, performance measures and performance targets are aligned with the underlying business risks of the company," Greenblatt said in the news release.

In response to the financial services sector situation, organizations are discussing steps to mitigate excessive risk-taking. Although requiring all or a portion of annual incentives to be paid in stock that would vest over time is one option talked about (and implemented in some financial service organizations), Mercer’s survey shows that it is not a trend in other sectors. Only 4% of companies outside of the financial sector indicated they had or were considering such a feature.

The survey also found that despite reports of "say on pay" – a nonbinding shareholder vote on executive compensation – becoming more prevalent, less than one-quarter (19%) of companies have adopted or are considering adopting it for 2010.