U.S. firms changing executive compensation practices: Survey

Long-term incentives shifting from stock options to performance shares
|hrreporter.com|Last Updated: 10/21/2011

The majority of large United States companies are strengthening their executive compensation program’s pay and performance alignment as well as implementing shareholder-friendly corporate governance practices, found a recent survey by Meridian Compensation Partners.

“The pace at which companies have adopted more rigorous executive compensation programs and sound corporate governance practices is remarkable and confirms that boards and management teams are listening to shareholders,” said Matthew Isakson, a senior consultant at Meridian. “It is notable that boards now require performance-based awards to be the primary component of long-term incentives, especially considering the volatile and challenging economic environment.”

The mix of long-term incentives (LTIs) has shifted dramatically from stock options to performance shares, found the Corporate Governance and Incentive Design Survey, which polled 250 companies.

Nearly 90 per cent of companies surveyed use a performance share-type instrument that pays out only upon achievement of certain performance criteria, most often relative total shareholder return or critical financial performance metrics. However, stock options and service-based restricted stock remain prevalent too, used by 72 per cent and 64 per cent, respectively. This demonstrates widespread use of a portfolio approach towards LTI grant practices, said Meridian.

Companies are now providing almost one-half (46 per cent) of an executive’s LTI value in performance shares. Stock options now account for only one-third of the LTI value (down dramatically from 80 per cent 10 years ago), while service-based restricted stock makes up the remaining value delivered (21 per cent), found the survey.

Nearly 80 per cent of companies now have a majority voting standard (versus a plurality voting standard) in place for director elections. Additionally, over 90 per cent of these same companies have a mandatory resignation policy in place if a director fails to receive majority support from shareholders.

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