Most executive incentive plans to be close to target

Changes to pay programs stabilizing: Mercer
||Last Updated: 03/09/2012

Nearly two-thirds (63 per cent) of companies expect annual incentive plans to fund at or above target levels for 2011 performance, according to a survey by Mercer of more than 280 organizations in Canada and the United States.

While most employers reported making changes to plan performance measures in 2011, the majority are stabilizing annual and long-term incentive programs despite renewed market volatility in the latter part of 2011. About one-quarter (26 per cent) anticipate changing the weighting of performance measures in annual incentive plans and 24 per cent plan to change the measures used in performance-based long-term incentive plans.

The top drivers for making changes to both annual incentive programs and long-term incentive programs are to align with industry or peer group practices, align with best practices and reward or retain top talent, found Mercer’s Executive Compensation and Talent Management 2012 Survey.

“As a result of the ongoing global economic uncertainty, companies are still being cautious about making significant changes to their executive compensation programs,” said Audrey O’Connell, principal in Mercer’s talent, rewards and communication business. “However, the changes being considered clearly recognize the importance of maintaining best practices and differentiating pay to retain top talent.”

Long-term incentive grants

As companies adjust to the new normal of unpredictable market volatility, they are staying the course with respect to long-term incentive grants, said Mercer. Of the 74 per cent of companies that had some clarity on what 2012 long-term incentive grant levels might be, 70 per cent anticipate grant values in 2012 will be equivalent to 2011 grant values.

Additionally, of the nearly two-thirds (63 per cent) of companies that reported on 2012 run rate expectations, 60 per cent anticipate 2012 run rates will be about the same as 2011.

The mix of long-term incentive awards is not anticipated to change significantly, found the survey. The most notable change, reflecting a continuing trend, is an increase in the weighting of performance share units for executives (10 per cent of companies plan to increase the weighting).

Although few companies are considering changes to long-term incentive compensation programs, the most prevalent changes include the differentiation of grant sizes based on individual performance (29 per cent of companies are planning this change for executives in 2012 and 25 per cent for non-executives) and, for performance-based long-term incentives, increasing the weighting of absolute performance measures (12 per cent of organizations).

“Companies are clearly stabilizing their short-term and long-term plans to focus their executives on achieving sustained and steady performance, said O’Connell.

Primary drivers for changes to annual incentive plans:

Align with industry, peer group practices


Align with best practices


Reward, retain top talent


Differentiate awards based on individual performance


Prepare for uncertain business outlook in 2012


Source: Mercer

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