February 5, 2015
Pay-for-Performance: Cracks In The Ice
– Broc Romanek, CompensationStandards.com
Love the title of this piece by Towers Watson’s Steve Kline. Here’s an excerpt:
As we reported last month, the third quarter began to show real signs of recovery and growth. (See “Pay-for-Performance Update: Third-Quarter Checkpoint,” Executive Pay Matters, December 22, 2014.) Mild optimism was beginning to form for 2015. But, some cracks in the ice appeared as the year drew to a close and 2015 got under way. Oil and other commodity prices continue to slide, putting a damper on a number of industrial sectors. Concerns in Europe have led to a strengthening of the dollar, which constrains U.S. exports and cuts into foreign profits as sales abroad are converted into fewer U.S. dollars. Other sectors face a range of issues. For example, some retailers’ sales were soft in December, while insurance companies are fretting over capital markets challenges. The bottom line: some earnings disappointments are being announced and/or forewarned.
In the coming weeks, many companies will finalize their incentive plan goals for 2015. As always, this will be no slam dunk. Will the 2015 numbers be an extension of 2014 results? Given the softer start for the new year, perhaps not. Will 2015 reflect the optimism that emerged with third-quarter results? For most sectors and companies, that would seem a bit optimistic today. However, given some of the sharp swings we’ve seen in the global economy and markets in recent years, who knows about tomorrow? Will the range of performance goals that surround target be stretched to accommodate the emerging uncertainties? In many cases, perhaps yes. Will potential rewards be modified in concert with shifting performance goals? Perhaps in extreme cases, although proxy advisors and shareholders may hope for larger modifications to pay opportunities.
In this environment, companies clearly have a tough call in deciding how far to venture out on the ice in their 2015 performance targets. To set rigorous targets, Towers Watson’s Principles and Elements of Effective Executive Compensation Design suggests that companies should consider a number of inputs, including:
– The organization’s long-term strategic plan
– Enduring standards reflecting historical norms of financial performance for the organization, industry and relevant peer organizations
– Analyst/economic forecasts
– The organization’s budget.