A recent survey by Watson Wyatt Worldwide Inc. found that 79 percent of corporate directors think executive pay models in the U.S. have hurt the image of corporate America - only a slightly smaller percentage than the 85 percent of institutional investors who have the same view.
And boards are reacting with a number of changes.
For example, they are shifting away from a heavy reliance on stock options to a portfolio of long-term incentives that include time-vested, restricted stock keyed to corporate financial targets and performance shares tied to the achievement of key financial measures.
Compensation experts also expect boards to put greater emphasis on cash bonuses tied to the achievement of one-year operating measures. They also anticipate that the need to disclose and explain the rationale behind compensation plans will lead boards to make cutbacks in perquisites and dramatically reduce severance and change-in-control packages, and enhanced retirement or supplemental executive retirement plans.
``Boards are getting skittish because of the increased focus by activist shareholders and the general public,'' said Matt Turner, senior compensation consultant with Mercer Human Resource Consulting in Chicago. ``They have become more reluctant to make discretionary awards that are out of sync with corporate peers or that are too far afield from where performance is,'' Turner said.
``The tone is on performance and boards are asking more specific, more pointed questions,'' said Jim Aslaksen, global sector leader for performance materials in the Chicago office of Los Angeles-based Korn/Ferry International, who recruits executives for the chemical, plastics and packaging industries.
Aslaksen said boards are being more proactive and much more diligent, spending more time in preparation for meetings on executive compensation. ``They want compensation to be in lock step with the performance of the organization,'' Aslaksen said.
Paul Hodgson, a senior associate at Corporate Library, a research firm in Portland, Maine, also is convinced that more boards are looking at adjusting compensation practices because of Financial Accounting Standards Board 123R, Sarbanes-Oxley and the new Securities and Exchange Commission disclosure rules.
But he's not sure how much real change is happening.
``Boards today feel that they are much more exposed and it has changed the way they are thinking about compensation,'' Hodgson said. ``However, I don't think it will have much impact in terms of levels of compensation. But there may be less confusion about the amounts going into deferred compensation and the dollar value of each of the components of the compensation plan.''
But one example of what may be to come as more compensation information is disclosed is the way boards have become more careful about how they use stock options in the aftermath of the backlash from the use of backdated options, largely by high-tech companies.
``There is criticism that stock options represent dollars falling from the sky,'' Turner said. ``[In] every single conversation that I have when I meet with boards of directors, the granting of stock options is a topic of discussion for future change.
``Companies are still very willing to pay very well for superior performance. But they want to make it contingent on performance and make sure there is a good balance between short- and long-term incentives.''
Joe Mallin, managing director in the Atlanta office of Pearl Meyers & Partners, the New York-based executive compensation practice of Clark Consulting, said larger companies, including those in the plastics industry, already have moved away from options and that the strategy is beginning to ``filter down'' to smaller firms.
``Going forward I see companies still using stock options, but also using restricted stock with time-based vesting and performance shares,'' Mallin said.
That shift makes good sense, particularly for chemical and plastics companies where there often are a lot of assets to manage and where there is a need to ``manage market cycles and commodities,'' said James F. Reda, managing director of James F. Reda & Associates LLC in New York. In those industries, it makes sense to set performance goals based on asset management.
But the change will be a gradual - not an overnight - shift.
According to a recent Pearl Meyers & Partners survey, only 10 percent of companies have discontinued stock options and just another 13 percent have reduced their use of stock options. Only 10 percent have shifted to performance shares, another 7 percent to restricted shares and 3 percent to other types of long-term incentive awards.
However, as companies begin to adopt new models of pay, don't expect total compensation levels to shrink - or for mega-dollar deals for top executives to disappear.
``Disclosure in and of itself will not keep executive pay in check,'' said Joseph Rich, president of Pearl Meyers & Partners. ``To the contrary, disclosure and the availability of data [will] provide fuel for ever-increasing levels of executive compensation.''
As Mallin explained: ``Disclosure provides information that is of keen interest to executives eager to compare their paychecks with those of their peers in other corner offices. They will be able to more easily analyze and compare programs on a dollar-for-dollar basis with their peers at other companies'' and are likely to ask to be compensated in line with others in their industry.
If that occurs, it won't be the first time that an effort to cap pay - or an attempt to curb high compensation levels - leads to a pay increase, he said. As Mallin points out, when Rule 162 (m) of the Internal Revenue Service was approved by Congress in 1993 to limit deductions to the first $1 million of compensation paid to executives, excluding performance-based incentives, ``the salaries of many CEOs went up to $1 million.''
``Things like that which are put into place with the intent of capping pay often only end up creating a floor instead,'' Mallin said.
In addition, even with new rules and regulations, choosing the right incentives remains a daunting task.
``Companies are under the microscope and it is easier for them to do what others are doing'' and assume those are the best practices, said Andrew Goldstein, central division practice leader of executive compensation in the Chicago office of Watson Wyatt.
``But it may not lead to the best compensation program for your company. You have to make policy decisions based on the right things for your business and not be driven by the herd. Companies have to think about their long-term strategic objective - and that may be different from [their] one-year business plan.''
For manufacturing - including many plastic companies, things like the cost of capital and generating a return that exceeds the cost of capital are ``critical and essential,'' Goldstein said, and metrics should be restructured to push executives to employ their capital assets better.
``It comes back to the performance metrics,'' said Ron Bottano, a senior partner with Korn/Ferry. ``It is important that manufacturers focus on hard, quantitative measures and items related to operations and generate a cash flow.''
For that reason, some suggest manufacturers, including those in the plastics industry, are ahead of their peers in developing packages more attuned to their performance.
``Relative performance is something that manufacturing companies have [used] for years because of their exposure to commodity prices and exchange rates and the need to outperform their peers,'' said Turner.
But even though manufacturers may have a leg up, Corporate Library's Hodgson questions whether companies choose the right performance measures and targets.
``Many of the current set of long-term incentives are so poorly designed that it is almost impossible to identify why CEOs make those amounts of money,'' said Hodgson.
In his view, many payouts are made even when there are mediocre or negative performance levels.
``In most plans, as long as you do better than people in your industry or peer group, you can still get a good payout,'' Hodgson said.