| Executives Can Expect Smaller Bonus Payouts |
In its recently conducted "Hot Topics in Executive Compensation" study, Hewitt surveyed 202 major U.S. companies and found that 37 percent expect their next executive bonus payouts to be in the range of 50 percent to 100 percent of target. Furthermore, 28 percent believe payouts will be between 1 percent and 50 percent of target, and 13 percent of these organizations don't plan on paying executive bonuses at all.
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Meanwhile, 22 percent of companies surveyed anticipate paying executive bonuses above target. This is significantly lower than the last several years, when approximately 50 percent to 60 percent of companies had bonus payouts greater than target. In most cases, survey respondents indicated that payouts are in early 2002 for 2001 performance.
"We are definitely seeing the economic volatility of the past 12 months impacting executive bonuses," said Tracy Davis, senior consultant for Hewitt Associates. "Since the economic landscape has changed so dramatically, several companies are evaluating their current executive bonus plans to ensure goals are both realistic and motivating. However, before implementing significant plan redesigns, organizations need to first examine performance measures to ensure they are aligned with the business strategy, and consider total cost as well as input from key executives and boards of directors."
The Hewitt study also found that 22 percent of respondents plan to implement different performance measures for their 2002 executive bonus programs, 22 percent intend to develop different performance hurdles for existing measures and 18 percent plan to alter 2002 goals. These changes come as companies try to establish goals that are more in line with today's business environment.
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Equity-Based Compensation
In determining stock grant sizes for 2002, two-thirds of the companies Hewitt surveyed will make approximately the same size grant (defined as the number of shares times the exercise price) to executives despite stock price declines at many companies. Additionally, more than 90 percent of companies indicated they will grant the same or more shares in light of a stock price decrease. In 2001, 63 percent of the companies in this study experienced negative stock price performance.
In addition, this study reveals that companies will experience higher "run rates" (stock options granted divided by common shares and options outstanding, plus remaining shares in the pool), as more shares are needed to compete for top talent. In years past, a 1 to 1.5 percent annual run rate was common. However, organizations now are experiencing higher levels of dilution and run rates. In fact, nearly 30 percent of respondents are expecting to exceed a 2 percent run rate in their upcoming stock option grants.
"Despite the current economy, companies still need to implement programs designed to motivate and retain the best and brightest talent," said Davis. "At the same time, however, companies are facing increased questions from shareholders frustrated with poor stock returns and option holders with little wealth accumulation through stock options. Also, boards of directors are keeping a watchful eye on annual run rates and the impact of diluted stock options. As a result, there appears to be a willingness to be more selective with the option-eligible population in 2002."
About Hewitt
Associates LLC
Hewitt Associates LLC www.hewitt.com
is a global outsourcing and consulting firm delivering a complete range of
human capital management services to companies including: HR and Benefits
Outsourcing, HR Strategy and Technology, Health Care, Organizational Change,
Retirement and Financial Management, and Talent and Reward Strategies.
Source: Newstream,
January 2002
Graphs
courtesy of Hewitt Associates via Newstream. ©2002 Hewitt Associates,
LLC. All rights reserved.
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