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Human Resource Executive
December 16, 2011
Earning It
A poll conducted by independent compensation consultancy Pearl Meyer & Partners found 52 percent of respondents indicating a 2 percent to 4 percent salary increase for executives next year, and another 10 percent saying they anticipate a salary freeze or decrease in 2012.
The move toward moderate salary increases and tougher performance goals for execs really began nearly two years ago -- with good reason, says Jim Heim, managing director at Pearl Meyer & Partners.
"Progressively tougher goals for 2010 and 2011 made sense," Heim says, "given that the bulk of companies were showing year-over-year improvement on financial and operational measures."
But improved results are not necessarily the case heading into 2012 -- and an additional factor seems to be at play as well, Heim says. "Heightened scrutiny of executive-pay programs has made many companies hesitant to set a performance target that is below the prior year's performance," he says. "The rational approach in any given year is to set a performance target that's realistic given the company's specific challenges and opportunities for that year." Hopefully, he adds, "what we're not seeing is the implementation of irrationally tough target performance hurdles or additional opportunities for discretionary bonus awards that are not linked to financial or operational progress."
Heim adds that "institutional shareholders have advocated this shift across multiple industry sectors and company sizes," noting that "the largest companies are the ones under the most pressure to implement such programs, given the level of scrutiny their pay programs receive from investors."
This evolution is likely to continue -- and is likely to continue to create additional challenges for HR in the future, Heim says. A combination of equity-dilution concerns and line-of-sight considerations has "tended to reduce the size of the population eligible for long-term incentives over the past five or so years," he says, with long-term incentives being more and more limited to those employees with the most impact on share-price performance.
"At the same time, there is pressure to provide additional performance hurdles to long-term incentives, and to lengthen the vesting period or bolster ownership requirements to ensure true long-term alignment with shareholders," he says. As such, "HR needs to be positioned to support pay decisions that will provide the most bang for the buck by identifying critical-need populations," Heim says. "HR also needs to be deeply involved in developing principles-based processes for allocating these long-term incentive pools.
"In the 'say on pay' era," he says, "it is increasingly important that pay decisions be defensible to both investors and employees reading the proxy filing."
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