Tougher competition for talent and more complex succession planning issues are making boards broaden the context for compensation decisions
An improving economic outlook, a fierce global battle for talent and the influence of proxy advisory firms are the main factors affecting executive rewards programs, according to the recently released Mercer Executive Rewards Survey.
As boards of directors receive more pressure to exert a higher level of scrutiny when making decisions about executive benefits and compensation, Mercer’s annual study of the compensation practices of more than 215 employers across all industries throughout the US and Canada revealed several findings that can be instructive for boards and governance professionals.
First, the general strength of the current economic outlook has had a positive impact on adjustments to executive rewards programs. These adjustments include a decrease in the percentage of companies using special retention grants -- restricted stock units given to executives as an incentive to keep them from leaving the company -- from 14 percent in 2013 to 4 percent in 2014. The use of long-term incentive vehicles has fallen from 22 percent in 2013 to 6 percent this year.
Instead of including those types of incentives, ‘companies are relying on the use of corporate financial measures,’ says David Cross, a partner at Mercer who worked on the survey. ‘They are using earnings-based measures, the measure of cash flow and income statement indicators that look at the financial performance and effectiveness of the company.’
Next, the survey results show that the top priorities for boards when setting compensation programs ‘are to focus on retaining executives where they have retention concerns and aligning pay programs with performance – an individual’s performance or team performance,’ says Cross. ‘Those are the two things that drove pay decisions most prominently.’
Third, the extent to which companies weigh and incorporate the views of external proxy advisors when setting pay programs has increased from 2013 to 2014. ‘The influence of groups like ISS on setting and defining pay programs has increased in the last year, albeit the increase is still relatively small relative to some other factors,’ says Cross. The report reveals that 17 percent of companies surveyed said that aligning with groups like ISS was what drove their decisions, up from 15 percent last year.
Finally, the survey reveals that a shortage of leaders with expertise to run complex organizations, intense competition for executive talent around the world and the rising cost of attracting and retaining talent have made boards of directors broaden their focus to include more executive management and workforce related issues. Mercer reported, ‘We are finding some compensation committees are in fact changing their name to HR committee or compensation and leadership development committee.’
Cross suggests the new complexities around talent availability and succession planning have pushed companies to begin using pay programs as a means of managing their executive talent. He also sees a trend toward more consistency of pay programs across virtually all industries. That partly reflects a greater concern among all companies with aligning with proxy advisors so as not to be viewed as outliers in their industry peer groups. But it’s also due to globalization, which is not only compelling companies to operate in similar fashion as peers around the world, but forcing more executives to address similar kinds of complex situations in order to keep their organizations on course.
‘We want to make sure companies look at pay programs from the standpoint of being more effective and more aligned with their businesses so there is some consistency,’ says Cross. ‘The world is more complex than it used to be and it really is about identifying areas where companies can make [executive rewards] programs more effective.’
