What's Happening in CEO/Executive Comp

Attended the Wall Street Journal / Hay Group 2008 CEO Compensation Study webinar earlier this week and learned a lot about what's happening in CEO pay over the past year. The trends and changes are many.

The study looked at proxy filings for 200 large (>$5B in revenue) public companies that filed their proxy reports in the 10/08 to 3/09 period, so the data is very current. While I realize that most of our blog followers are not in companies of this size, many (if not most) major trends in executive compensation tend to come out of larger firms, who have the internal and external resources to research, develop and implement new and new, different and "game-changing" executive compensation programs.

While the issues and trends discussed in the study are too numerous to cover here, below are some of the major trends and issues discussed with regard to CEO compensation:

• CEO total compensation dropped in 2008 for the first time since 2001, when the U.S. was in a recession and suffering from post-Internet "bubble."
• The drop in Total Cash Compensation (TCC) was -8.5%, due to a drop in cash incentives of over 10% in 2008 vs. 2007 (base pay was up 4.5% in 2008; it won't be up that much this year though).
• Total Direct Comp (TDC), which is total cash comp or TCC, plus realized gains from stock or other sources was down 3.4%.
• The shift away from stock options towards performance shares (stock that grants and/or vests based on the achievement of predetermined performance targets) continues. The use of restricted stock was down slightly, largely at the expense of performance shares.

Some major executive comp practice trends noted in the survey were:

• More and more companies are reducing or changing some of the more egregious (at least from the outside critics' perspectives) executive compensation practices (see details below).
• Executive perquisites or "perks" were roughly flat in 2008 with 2007, after several years of gains. Recently imposed reporting requirements, as well as increased scrutiny of these perks may have slowed down their growth.
• Gross-ups (covering the taxes owed by an executive on compensation, often on special perks) are declining in prevalence, due to their widely negative perception. There's an article on this in the 4/21 Wall Street Journal (paid subscription required).
• Clawbacks (the ability to recover an ill-gotten gain) are increasing in usage (and are required under the Federal TARP program).
• The "Say on Pay" (non-binding shareholder votes on executive compensation plans) movement is gaining steam. While not required now, it was the feeling of the expert panel that eventually, this may be required by Congress (it already is for TARP recipients).

Other trends noted in the presentation:

• Increased emphasis on performance-oriented equity, such as performance shares. Performance shares have been gaining ground for the past few years, and the panel expect that trend to continue.
• Compensation committees should start to look at concept of "risk" in their executive comp plans. In other words, do the plans they help set encourage excessive executive risk taking? Comp committees should help to "manage" risk in designing executive rewards.
• Companies will be very conservative with base pay in 2009 (this is already happening, with many companies freezing base pay for executives).
• Reduced perks are likely, gross ups on the decline, and pressure to reduce or eliminate high-value golden parachutes.

Well, that's about it for now. The full report should be out in May, and would suggest that those of you who are interested in major trends in executive compensation should look for it via the WSJ or the the Hay Group.