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New Survey Previews 2010 Executive Pay Decisions
Pearl Meyer & Partners Report Finds Clear Differences in Pay Between Strong and Weak Performers

NEW YORK, November 30, 2009 — While Wall Street remains a focal point of public anger over executive compensation, a new survey finds that many companies outside of the financial sector are diligently working to more closely match pay to performance and re-examine a number of the pay program features that have proved particularly troubling to shareholders and employees.

Compensation Planning: Looking Ahead to Executive Pay Practices in 2010, a new report by independent compensation consultancy Pearl Meyer & Partners, found that even companies who believe they are outperforming their peers project only modest salary increases. Survey respondents also indicated that they are taking a cautious approach to both the design and payout levels of short-term and long-term incentive rewards.

"Such clear differences in pay decisions between strong and poor performers are an indication that pay-for-performance is working at many firms," said Jim Heim, Managing Director of Pearl Meyer & Partners. "The survey also confirms that companies are slowly but steadily migrating away from many traditional executive perquisite programs."

Survey participants included 395 organizations from the Fortune 50 to emerging high-growth organizations, of which nearly three-quarters are publicly traded and 20% are closely or privately held, with tax-exempt or governance-charted organizations accounting for the remainder.

Not surprisingly, the survey found corporate performance declined across all industry categories. Only 20% of respondents anticipated beating this year's internal benchmarks for profitability, and only 16% expected revenue growth to exceed internal budgets.

In terms of 2010 executive pay decisions, there were clear differences between those expecting their performance to be "above peers" for 2009 and those expecting results "lower than peers." Among stronger performers, 53% anticipate base salary increases above 3% (compared to 32% of lower performers), 86% expect to receive a bonus payouts for fiscal 2009 performance (compared to 65% of lower performers) and 40% expect an above-target payout (compared to 31% of the lower performers).

Nearly 64% of respondents froze or trimmed executive base salaries in 2009, and more than 20% of respondents expect to freeze salaries in 2010. Among companies projecting strong performance through the end of this fiscal year, nearly 90% said they will limit salary growth in 2010 to 4% or less. "Given the continued volatility in the economy, many companies are being especially careful to control their fixed costs," Heim said.

In total, nearly one-quarter of respondents do not plan any annual incentive payouts in 2009, and the majority of those making payouts expect award levels to be below target. Twenty-two percent of respondents changed their annual performance metrics in 2009 (e.g., from EPS to cash flow) and 16% widened the range of performance eligible for payouts. "Expanding the performance zone helps to avoid extreme upside or downside results by moderating compensation levels," Heim said.

For 2010, 39% of respondents expect to raise the bar on performance goals and 28% plan to switch to relative performance metrics (where performance is measured against peer firms or industry indices). Many governance advocates believe the use of relative measures helps neutralize the impact of general market changes not directly related to executive performance, but also recommend including a mechanism to prevent rewarding "best of the worst" outcomes.

About one-third of respondents expect to increase the number of shares in long-term incentive (LTI) grants to executives in fiscal 2009, although, depending on the timing of the awards, grant values may be down relative to 2008 due to lower share prices. Companies also are contemplating LTI modifications heading into 2010 to promote a longer term performance perspective:

• 10% have implemented new executive stock ownership guidelines and 4% increased existing requirements.
• 14% have contemplated adding new "hold until retirement" and 7% considered new "hold past retirement" provisions for equity grants to executives, although very few actually implemented these plans in 2009.
• 4% increased the length of vesting (e.g., from 3 years to 4 years) for stock grants and another 3% anticipate implementing such changes in 2010.

"The pace of adoption for these practices will accelerate with a sustained market recovery", Heim observed. "Many executives will be willing to sacrifice at least some liquidity and diversification opportunity for the growth potential of continued equity grants.

While the vast majority of respondents did not revise their arrangements for payments to executives upon termination or change-in-control, there is a clear trend towards decreased benefits in this area. Eight percent of respondents in the last year decreased gross-up provisions to executives, which cover the taxes triggered by "parachute" payments following a change-in-control.

Executive perquisites account for a small percentage of total compensation value, but have proved to be a significant driver of investor and employee dissatisfaction. The survey found companies migrating away from provisions for executives such as:

• Personal use of corporate aircraft: 13% reduced in 2009 and about 3% are contemplating a decrease in 2010
• Car allowance: 16% reduced in 2009 and about 9% are considering doing so in 2010
• Reimbursements for financial planning services: 12% reduced in 2009 and over 7% are considering a reduction in 2010.

When asked to identify the compensation topics that raise the most concern for 2010, 23% of respondents indicated that they were "extremely concerned" with "selecting performance measures and setting goals for incentive plans." "Companies are conducting more robust analysis of �value drivers' in order to identify the specific measures of performance that correlate most closely with long-term shareholder value creation," noted Heim. "We're also seeing greater consideration being given to shareholder expectations of forecasted growth with respect to goal setting in bonus plans."

Additionally, 21% of respondents were "extremely concerned" about the issue of "modifying pay programs for a changing economic environment."

Pearl Meyer & Partners' survey, Compensation Planning: Looking Ahead to Executive Pay Practices in 2010, was conducted in September 2009. Participants included 100 executive officers, 33 board members and 262 human resources professionals representing 377 distinct organizations.

The full survey is available at www.pearlmeyer.com/execcompplanning/.

About Pearl Meyer & Partners

For 20 years, Pearl Meyer & Partners has served as a trusted independent advisor to Boards and their senior management in the areas of compensation governance, strategy and program design. The firm provides comprehensive solutions to complex compensation challenges for companies ranging from the Fortune 500 to 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.