The Advisors' Blog

– Doug Friske and Paula Todd, Towers Perrin

For many compensation committees, the recent stock market nosedive has made decision-making about 2009 long-term incentive grants the most challenging in recent memory. One issue attracting a lot of attention right now is how to determine the appropriate number of options, shares or units to grant in light of the significant share price declines most companies have experienced over the past few months.

Companies that have followed a practice of granting a fixed number of options or restricted shares are concerned about how that practice may affect executive retention and motivation, in that a lower share price would mean a smaller expected grant value under this approach. The more common approach of targeting the specific dollar value of long-term incentives to grant, based on competitive levels and surveys, is also problematic in the current environment for a number of reasons.

The bottom line is that equity incentive grants are likely to be lower in value at many companies this year. Indeed, over 40% of the companies participating in our recent pulse survey on compensation issues in the economic crisis have already concluded that the expected value of their 2009 long-term incentive (LTI) grants will be lower than last year’s, and other recent studies have shown similar results. We expect when all decisions have been made, the percentage of companies reducing their grant values will end up being even larger than these studies suggest.

Here is a memo with a closer look at the LTI granting issues companies are facing in the current climate, and some of the key considerations compensation committees need to keep in mind. The decisions companies are making today regarding their LTI values will have a ripple effect in the future as these grant values make their way into proxy statements and compensation surveys. As such, and since the recent volatility in the capital markets may continue for the foreseeable future, we don’t expect the issue of how best to determine LTI grant values to go away any time soon.

Tune in today for the webcast – “Compensation Arrangements in a Down Market” – to learn a whole host of developments in the pay area. Things have been changing fast.