The Year the Penny Dropped

Short-Term Incentives: What Bonus?
Most executives didn’t need to clip their base salaries to feel a compensation pinch. “In this market, an executive’s base salary accounts for maybe 20% of total compensation,” says Marc Lattoni, a founding member of Calgary’s Total Reward Professionals. Another 40% or so may come via short-term incentives such as performance bonuses.

“Most of these are tied to the company’s profitability, so it’s a simple formula: when you make no money, there’s no bonus,” says Lattoni. Most companies – and bonus (non) recipients – have been OK with that.

“The approach to annual bonuses has stayed pretty solid too because generally, they’ve had some good metrics to them,” says Brien Perry, compensation manager at Enerplus Resources Fund. Perry thinks the low or non-existent bonuses may actually have been good for the market. The oil and gas industry in Alberta, he suggests, has developed a bit of an “entitlement mentality” over the prolonged upswing. People could use a reminder that bonuses aren’t automatic.

Long-Term Incentives: The Nut to Crack
The biggest issue for most companies is long-term incentives. And generally, that means the contentious but well-established practice of aligning executive pay with company performance over the long term via stock options or restricted share units.

“The problem with LTIs is most of them are worthless right now,” says Lattoni. For many executives, LTIs account for the bulk of their compensation package. So what’s a board of directors or compensation committee to do when most of what their top exec was expecting to make is suddenly zero? “Either let them expire,” says Lattoni. “Or, organizations say, I have to deliver some value because I promised them these things will be worth something.”

If you thought letting the options die was the tough choice, you’re wrong. Repricing options “is considered bad form at the best of times,” notes Lattoni, and companies who’ve decided to do so have come under fire from within and without.

Flint tackled some of the concerns around LTIs by moving much of its management to restricted stock units (RSUs), which retain some value even during times of market volatility, since you don’t have to exercise an option to buy them. But for the executive team, stock options remain the key LTI. “The feeling was that we as an executive team needed to accept the risk [inherent in options] more so than middle management.”

At the same time as they struggle to ensure there’s an LTI plan that appropriately rewards its talent, boards are “trying to recalibrate their incentive plans to prevent perverse payouts,” says Gryglewicz. Because most LTI plans were built around historic models of “consistent upsides,” current economic circumstances could create situations that trigger massive payouts that will appall shareholders, the market and the public.

You don’t want appalled shareholders. Not in 2009.

No one’s come up with the ideal post-2008 LTI yet, nor with the perfect executive compensation plan. But lessons have been learned. Compensation consultants have been reminded – if they needed reminding – that “shareholders are really our clients underneath it all,” says Gryglewicz, “and at the end of the day, what you need in any compensation plan is transparency for your shareholders.”

And the executives themselves? Henderson thinks the most important lesson has been that one must take a long-term approach to compensation. Seasoned executives who are committed to their organizations, he says, “recognize that every year is not a banner year when it comes to compensation.”

As for the ones who are there to make as much money as possible in a year or two… you probably don’t want them on your team anyway. Do you?

Get more advice and context on the executive pay issue at Albertaventure.com > Web Exclusives > The Skinny on Executive Pay

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