This undoubtedly will be a pivotal year for finance in all kinds of ways. It is debatable whether one issue, executive compensation, is deserving of so much attention, given the deep seismic shocks across the financial system. Still, market and governmental forces are aligning in the direction of vast change on the pay front.
Companies may break with current practices on underwater stock options, bonus calibration, golden handcuffs, and the mix of long-term and short-term elements of compensation packages, among others. They likely will be pressed to make greater disclosure of executive comp programs, and they may even be required to give shareholders an advisory vote on top managers’ pay.
At stake is nothing less than the public perception of their business acumen — a pretty important asset in the current shaky climate. “We’re going to see companies either applauded or criticized based on how they respond to these challenges,” says Mark Poerio, a compensation and benefits partner at the law firm Paul Hastings.
This year will see more than half of U.S. companies (54 percent) paying smaller bonuses for 2008 performance than for the prior year, according to a survey of 513 companies released today by Towers Perrin. And 4 in 10 expect executive bonuses to be 25 percent or more below last year’s levels. Almost three-quarters (73 percent) say the financial crisis has affected their approach to setting 2009 performance targets.
Paul Hastings held a media briefing this week to outline the array of shifts in the executive compensation arena that are already under way or expected to take shape in 2009.
The vast majority of stock options — at least 85 percent, according to published reports — are under water and likely to stay there for a long time.
At one time, it was common for companies to simply reprice options during economic downturns in order to hang onto their top talent. But a wave of repricings in the early 1990s led to the Securities and Exchange Commission issuing strict disclosure rules and a surge in shareholder activism on the issue that has not quelled to this day. Right now, sentiment against repricings is so deep that very few companies have taken that route. Others, at most, are weighing the costs and benefits of such a move very conservatively.
There was, though, a recent major exception: Google, which replaced all of its employees’ worthless options with new ones at current market value carrying a one-year vesting period. Poerio sees that move as a likely harbinger of a thaw in companies’ cold shunning of repricings.
“I think we’re going to see companies straightforwardly wrestling with it, and some other leaders like Google will come out, and there will be an escalation of repricings, despite the last 15 years of shame that goes with them,” he says. “In this cataclysmic downturn, you might have to rethink your prejudices and acknowledge the value of repricing if you want your people to stay.”