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.

Unemployment Soars in the Pacific Northwest

Having lived in the northwest since the mid-80s, I missed the "will the last person...turn out the lights" era. Back then, in the early 80s, the Puget Sound regional economy was dominated by Boeing, and today we're far more diversified than that. Our economic diversity has been no savior in this recession though (sort of like the stock market, where diversification hasn't helped there either).

But at least since I've been here in the northwest, this is by far the worst labor market I've seen (although my hometown - in the Detroit suburbs - is far worse off than we are, and won't be seeing any recovery for many years). Today's labor market makes the 2001-2003 jobs downturn look downright wimpy by comparison (and I thought the '01-'03 period was was pretty ugly at the time).

Oregon reported today that unemployment rose to 12.1% in March. That's tied for the highest rate the state has reported since it began tracking unemployment in 1947 (equaling the high point in the 1982 recession). That record will be broken soon.

While not as bad off as Oregon, Washington state is now up to 9.2% unemployment for March, jumping up nearly a full point from February's 8.3% revised rate. Meanwhile in Seattle, a jobs "safe haven" in the past few years, unemployment rose to 8.1%, from February's 7.6% rate.

Just one year ago, Washington's unemployment rate was 4.8%, and the Seattle metro area was well below 4%, so unemployment has doubled in the past 12 months.

If you've seen my earlier posts, I've been predicting for some time the worst labor market in many years, and now we can safely change "years" to "decades." We've also noted that the labor market is a lagging indicator, and so it's likely that unemployment will continue to worsen for several more months, even if the economy starts bottoming out and/or recovering soon (and no one knows when "soon" will be).

Join me at the Compensation Cafe'

I've started writing for the new Compensation Cafe' blog that was just launched earlier this week.

We have an excellent lineup of writers with strong and varied backgrounds in compensation.

Stop by for a taste at the Cafe', which promises “Serving up straight talk, original thinking and caffeinated discussion on everything compensation.”

See you there!

Merit Budgets Plunge to Lowest Level Ever

A recent study done by Watson Wyatt show merit budgets plunging to their lowest level ever (at least since records of these kinds of things have been kept), and we at AHRS think they are going even lower. Why? Just follow the news...

It's hard to be sanguine about the state of the labor market in the face of recent news:

• GDP fell a -6.2% in the fourth quarter of 2008 (worst fall since 1982).
  
• The Federal Reserve is predicting a -7% drop in 1st quarter GDP (from the Fed's "Beige Book" report released 3/4/09), followed by a projected 3% drop in the second quarter.
• The ADP National Employment Report(R) reported today that that private sector employment decreased by 697,000 in February.
• As companies sales, profits and balance sheet continue to deteriorate, there is nowhere for compensation budgets to go but down, and then down even further.

At this point, we do not see any reasonable hope for labor market improvement until 2010, at the earliest. Since labor markets tend to lag the economy's lead, and almost no one expects the economy to improve much this year, the likelihood of a turnaround in the labor market this year simply is not in the cards.

Employment and Income Drops in Silicon Valley

For the fist time since 2003, per capita income in the world's largest technology playground, Silicon Valley, has dropped. Year-over-year employment also dropped for the first time in years as well.

According to various reports, until the past few months, the tech sector was feeling pretty smug about possibly taking a pass on this recession, but now it's arrived in full force. No one is immune.

According to an article in today's Wall Street Journal, quoting Jason Hancock, CEO of Joint Venture Silicon Valley, "There was a feeling that Silicon Valley had special assets to help weather the crisis, but we now know we're in for the same pain." "We haven't hit bottom yet and it will be a while."

Employment was down 1.3% over the past 12 months, while per-capital income is own 0.8% over the same period. Both numbers had been rising steadily since the area started recovering from 2000 tech bust, which hit the Valley area economy quite hard.

I remember that prior to the tech bust in 2000, many in the industry felt that technology was recession resistant, but it turned out to be highly cyclical. Proctor and Gamble is recession resistant, technology is not. People need soap, but they can run their XP machines for another year without loss of life, or even of personal hygiene.

We expect employment, personal income, job prospects, wage growth and salary budget to continue to decline until the housing and banking crunch have hit bottom and started to recover. Honestly, nobody knows when that will be at this point, not even Federal Reserve Chair Ben Bernanke or Treasury Secretary Tim Geithner.

U.S. Unemployment Rises 4.9% in One Year

The U.S. unemployment rate spiked up 4.9% over the past 12 months based on January's 7.6% rate. This is the largest one-year increase since 1975 (the year after I graduated from high school - yikes!).

While the 7.6% rate seems awfully high, and it certainly is by any recent standard, the sheer volume of job losses is more staggering. 3.6 million jobs have been lost since the decline started in late 2007, but the past three months (11/08 - 1/09) have averaged approximately 500,000 jobs lost per month, an unprecedented pace.

More scary perhaps is the the BLS (Bureau of Labor Statistics) “U-6″ rate, that includes disaffected workers who have dropped out of the labor force in frustration and those who are "marginally" employed (such as those working PT, but wanting FT work, etc). This wider measure is now at an astounding 13.9% rate (up from 13.5% in December), or about one in seven workers in the U.S.

We at AHRS believe that joblessness will continue to rise at a fast clip, and unemployment will approach (or maybe even exceed) 10% before we hit bottom.

Merit and other salary increase budgets will continue to decrease, even though they are near historic lows already.

Our hope (and it's just that, a hope) is that the labor market and business demand will bottom in the second half of 2009. This hope assumes that the alleged stimulus plan (that full of all sorts of non-stimulus pork) has its intended affect, that the banking system can be stabilized (at taxpayer expense, of course), and that business and consumer sediment bottoms and starts to improve.

Even if all of these good things occur, it will likely be the second half of 2010 (at the earliest) before the labor market would start to rebound. The labor market tends to be a lagging indicator, as employers are generally reluctant to open their wallets, until they feel confident that a true turn-around is in place.

Merit Budgets Continue to Plummet

Just released results from the WorldatWork Salary Budget Survey Special Update reveal that merit budgets continue to plummet, and that Seattle-area budgets are down more than the nation as a whole.

Overall, results from the Special Update (data was collected in early December) show the average merit budget dropping to 3.1% from the 3.9% projected for 2009 when the survey was originally done in the spring of 2008.

Back here in the Pacific Northwest where we hail from, budgets have dropped even lower, to 2.8% in both Seattle and Portland, tied for the lowest large metro area merit budgets in the country.

Approximately 1 in 6 employers reported a 0% salary increase budget for 2009, a dramatic increase over recent years.

Merit budgets are back to historic low levels, last seen early in the decade, after the stock market collapse starting in 2000, and 2001 recession.

We at AHRS expect salary increase budgets to continue to drop from current levels in early 2009, although the pace of the decrease should slow, barring new unforeseen major economic events yet to unfold.