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Boards Take a More Active Role in Ensuring Pay-for-Performance, Pearl Meyer & Partners Survey Finds

Boards May Exercise Discretion, But the Bar is Raised and Payouts Often Reduced

Compensation Risk Assessment on the Rise

NEW YORK, May 11, 2010 — Corporate Boards are taking a bigger role in setting and enforcing performance standards, reports a new survey by independent compensation consultants Pearl Meyer & Partners. As a result, public companies are likely to make fewer incentive payouts to executives who fail to hit specific performance targets, according to the firm's On Point: 2010 Executive Pay-for-Performance Survey.

"Boards are increasingly engaged and vigilant about upholding a pay-for-performance philosophy," said Matt Turner, managing director of Pearl Meyer & Partners. Traditionally, companies have had some discretion to make payouts when performance targets were missed to recognize executives' efforts or factors outside their control. "Now, Directors face pressure to directly link pay with meaningful performance, knowing that proxy disclosures will give investors very detailed information about how incentive plans were administered," Turner said.

A total of 630 employees and outside directors participated in Pearl Meyer & Partners' On Point: 2010 Executive Pay-for-Performance Survey in February and March of 2010. An executive summary is available, and the full report can be ordered, at www.pearlmeyer.com/performance.

Fewer Discretionary Awards
While just over one-third of public company respondents do not permit any discretion in making incentive plan payouts, a majority have the option to make modest discretionary adjustments to annual cash incentive plans. "However, it is clear from discussions with directors that the actual application of discretion to override performance formulas must now clear a higher hurdle - and increasingly is being used to reduce payouts," says Turner. "Fairness" was the most common reason cited for applying discretion to payouts, at 44% of respondents, followed by 22% who reduce performance-based awards deemed "excessive."

Boards More Assertive in Setting Performance Standards

Support for Limits on Executive Pay
Some 65% of survey respondents said they believe there should be limits to executive compensation, even in cases where shareholder value climbs accordingly. "A majority of directors expressed a willingness to pay executives very well for truly superior performance.  But they clearly are uncomfortable with the idea of open-ended pay programs," said Turner.  "Their concern likely relates to uncapped cash bonuses and an aversion to so-called 'mega grants' of equity."

Management and Boards Differ on Compensation Risks
The survey results show that attention to compensation-related risk - a key SEC concern in the economic downturn - is still evolving. Sixty percent of survey participants expressed confidence that their Compensation Committees fully understand the level of risk in their companies' compensation plans. However, 21% said they lack confidence in Committee members' understanding of risk-related issues and the remaining respondents were uncertain. "Even more striking, only about one-third of survey participants said their companies have a formal process in place for risk assessment," said Turner, who noted that such a process is now required by the SEC of all public companies. The prevalence of risk assessment correlated with company size, ranging from 46% of companies over $1 billion that have a process in place down to 24% of companies under $100 million.

Measure Selection and Goal-Setting Takes Into Account Multiple Perspectives
A strong majority of respondents consider multiple perspectives and analyses in selecting performance measures for incentive plans, including business strategy, peer company practices and input from the CEO, CFO and board members. In setting annual goals, they are more likely to consider the annual budget, long-range planning and historical and peer performance comparisons. "As Compensation Committees are increasingly engaged in performance planning, they are less likely to accept 'the budget' as the final word," says Turner. In-depth analytics and valuation tools used to infer shareholders' expected levels of performance are less commonly relied on for either measure selection or goal-setting. "However, as Committees seek more in-depth information about the quality of performance goals, they will find such analyses worth the additional time and effort."

Performance Relative to Peers More Common for Long-Term Plans
Both annual and long-term incentive plans rely heavily on financial measures of profits, growth and return on capital relative to a peer group or external index. "Relative performance comparisons are generally more practical for long-term plans because of the timing of the data," said Turner. ROIC (Return On Invested Capital) is cited most often for relative comparisons (49%), in part because it can be generated by any combination of growth, profitability and/or asset efficiency, he added. "That allows comparisons to be made with companies with different business strategies, products and markets." In contrast, 79% of respondents said their annual plans are more likely to incorporate measures of non-financial and/or individual performance factors.

Report Available
Pearl Meyer & Partners' On Point: 2010 Executive Pay-for-Performance Survey includes data from 630 respondents at public and private companies across seven major industries, with annual revenues ranging from under $100 million to over $10 billion. It provides information on a wide range of incentive practices including: the performance measures used; the use of discretion in calculating awards; the analytics used in setting performance goals; the role of risk considerations; and the relative influence of the Board, management and outside consultants in compensation decision-making. The report is available to non-participants for $395.

Please visit to www.pearlmeyer.com/performance for more information and to order.

About Pearl Meyer & Partners
For over twenty years, Pearl Meyer & Partners (www.pearlmeyer.com) has served as a trusted independent advisor to Boards and their senior management in the areas of compensation strategy and program design, compliance and reporting, and committee structure, policies and procedures. The firm provides comprehensive solutions to complex compensation challenges for companies across all industries ranging from the Fortune 500 to smaller private companies and not-for-profits, as well as emerging high-growth companies. These organizations rely on Pearl Meyer & Partners to develop programs that align rewards with long-term business goals to create value for all stakeholders: shareholders, executives, and employees. The firm maintains offices in New York, Atlanta, Boston, Charlotte, Chicago, Houston, Los Angeles and San Jose.