January 20, 2012
Potential Shareholder Disconnect Calls for Added Attention to 2012 Incentive Decisions
– Broc Romanek, CompensationStandards.com
In this memo, Eric Larre of Towers Watson notes that the results of his firm’s recent survey of 265 companies reveal the potential for some unpleasant surprises at the close of the current executive pay cycle. Based on their operating performance through the end of October in what’s been a relatively good year for many companies, a majority of the responding companies anticipate that annual bonus pools will be funded at or above target levels, and almost half also project above-target funding for long-term incentive cycles ending in 2011. What’s more, very few of the respondents anticipate that their compensation committees will apply discretion to make adjustments to formulaic incentive payouts.
In short, many companies appear to be viewing the current incentive cycle as a time for “business as usual,” with executive incentive plans paying out in accordance with the plan formula and specific performance goals for the period. However, for the 42% of the responding companies that expect their companies’ shareholders to see negative total shareholder return (TSR) in 2011, it’s likely that some companies could experience a chilly response to the news of their incentive payouts for 2011 operating results from investors who view performance from the perspective of portfolio returns. It’s a very different landscape for investors today versus a year ago, and compensation committees and management should already be considering how different perspectives on pay for performance can best be addressed in their 2012 proxies.