Economic uncertainty amid continuing labor shortages are affecting employers' decisions about executive pay, new research shows.
According to newly released data from executive compensation consultancy Pearl Meyer, based near Boston, more than one-third of responding organizations gave their executives higher-than-normal merit increases this year, and almost 20 percent made off-cycle salary adjustments.
The survey was conducted between August and September 2022 among more than 300 US board directors, C-suite leaders, and senior HR practitioners.
About 20 percent of respondents recently increased short-term incentives (STI) and long-term incentive (LTI) award opportunities for executives, along with a rise in the number of employees eligible to participate in long-term programs.
"General economic uncertainty, inflation, and a tight labor market are weighing most heavily on management teams and boards of directors," said Bill Reilly, managing director at Pearl Meyer and lead sponsor of the survey. "While slightly more than half of our respondents are expecting year-over-year improvements in financial performance, they are clearly uneasy about what 2023 has in store, economically and talent-wise."
Approximately half of respondents target executive compensation at the market 50th percentile, with prevalence higher for base salary than variable pay (STI and LTI).
Public company respondents and those in the largest size category (revenues or assets above $10 billion) were more likely to target executive pay at the 50th percentile (or median) compared with private organizations, reflecting the impact of greater external scrutiny.
Slightly more than 40 percent of private and not-for-profit respondents (versus 32 percent of public companies) target total direct compensation above the 50th percentile, typically doing so between the 50th and 75th percentile, the survey showed.
Similar to 2022, salary increase projections for 2023 are above historical levels, with values across all employee categories equal to 4 percent at the 50th percentile and 5 percent at the 75th percentile.
Among other findings, 15 to 20 percent of respondents recently increased or plan to increase competitive positioning versus the market for one or more executive pay components (such as base salary, cash bonus, and equity-based incentives.)
Among those that grant LTI awards to executives, 67 percent expect to provide similar grant-date values for 2023 as compared to 2022, and 20 percent are forecasting higher values.
"The labor market is showing surprising job growth numbers one month and massive layoffs the following month," Reilly said. In light of this uncertainty, he advised employers to take account of their unique circumstances, and "ultimately, making compensation decisions based on your business goals and talent management strategy is the right approach."