April 2, 2008
Plan Adjustments: What to Do in a “Down” Market?
Broc recently asked me whether I thought companies are making any changes to their annual incentive plans in light of today’s adverse economic circumstances. Indeed, there are plenty of recent stories about companies doing just that. And according to news reports, these adjustments really frustrate shareholders.
Adjustments or plan changes regularly happen on the downside, and rarely, if ever, on the upside. When things are going well, CEO’s and other executives earn a lot of money. Some deserved – and some because of their good luck (think housing boom). When the company’s fortunes turn south, and shareholders take the hit, executive pay often stays close to their high levels.
You hear the executives say, “our most talented people will leave” or “they will not be motivated” or “we need to keep them focused, or else things will be even worse.” While this may be true in limited situations, that is why there are retirement programs, TVRS awards, base salary and other arrangements to provide some level of pay certainty and help to ensure retention.
I remember a client with an uncapped bonus having a windfall year, and the CEO voluntarily agreeing to reduce the bonuses from 400% of target to 225%. He said he wanted to save it for a rainy day when the company was not performing so well against its goals. This is rare, and requires having leadership trump immediate gratification and greed.
Undoubtably, some will also argue that given the short tenure of CEOs and other senior level executives, they have to try and grab every buck they can since they only have 3-5 years to make it. Life can be tough!
– Mike Kesner