The Advisors' Blog

– Broc Romanek, CompensationStandards.com

Here’s an excerpt from this Towers Watson memo:

Heading into the 2014 incentive year, about two-thirds of the companies participating in our survey had not implemented a policy for making adjustments for currency fluctuations in their incentive plans. But, as companies were tallying financial results for 2014, it was apparent that the dollar’s rise, which accelerated in the fourth quarter of 2014, had a negative impact on many companies’ full-year profits — and, thus, on the bonus results.

One of the key questions our survey sought to answer was when it came time for discussions of the bonus decisions in early 2015, did the pressures from currency fluctuations lead companies to consider making adjustments to bonus plan results to address the unanticipated impact of the strong dollar. The answer from our survey was an emphatic no. Our survey found that, despite the negative effects from foreign exchange volatility, nearly all companies with nonadjustment policies stuck with those policies. In other words, they maintained the original bonus goals and used the financial results as reported, even though bonuses may have been adversely affected.

However, another group of companies — roughly a quarter of our sample — took a different approach. At the start of 2014, these companies had established a policy of neutralizing the impact of currency fluctuations. For example, some companies planned to calculate financial results after applying constant currency conversions throughout the year, and to use these results for bonus purposes. Not surprisingly, at the end of the year, the vast majority of these companies maintained their policy and neutralized the impact of currency volatility when determining the bonus payout.

Of these companies that adjusted for currency fluctuations in 2014, most applied adjustments to both corporate and business-unit results. And if they had a long-term performance plan in addition to an annual incentive plan, most neutralized currencies in both types of plans, although some adjusted only for specific incentive plan metrics (e.g., revenues only).