Although most experts believe that pay is aligned more closely to performance incentives than ever before, 2007 executive compensation data illustrates that overall pay is likely to rise — even when there is negative performance.
Almost two-thirds of the 37 public plastics companies in the Plastics News ranking reported negative one-year total shareholder returns (TSR), with losses ranging from 1-81 percent. Of the one-third reporting positive results, two companies had TSRs of just 1 percent.
In addition, more than half of those same 37 firms produced negative TSRs over the past three-year period.
As one might expect, bonuses for short-term performance in fiscal 2007 declined — both in quantity and size — with the top 150 executives in PN's ranking earning a median bonus of $105,000, compared with $215,000 the year before. Also, of the top 150 ranked, just 43 executives received a bonus, vs. 137 executives a year ago.
In options, however, the median award jumped from $204,300 in 2006, to $231,156 in 2007, though the number of executives receiving such awards dropped from 67 to 60. In stock awards, the median rose from $91.9 million to $99.8 million.
What's more, average total compensation for the 150 highest-paid executives rose from $1.29 million to nearly $1.4 million.
Whether those increases are justified is difficult to evaluate for two reasons, compensation experts said.
``Most companies simply state the performance measures and the weights of each measure [in proxy statements], and do not disclose the actual performance targets or levels,'' said James Reda, managing director of compensation consulting firm James F. Reda & Associates LLC of New York. ``Very little is revealed to investors'' about incentives that account for 80 percent or more of pay, he said in a recent telephone interview.
A recent study by Reda's firm found that only one in six companies provided complete disclosure of short-term incentive plans. By contrast, 46 percent provided complete disclosure of long-term plans — which tend to use measures that reward executives based on performance relative to a peer group, Reda said. ``Long-term incentive payout vs. target data is harder to find,'' he said.
Second, there is the question of how to evaluate executive pay in the first place, said Bill Coleman, senior vice president of Salary.com in Waltham, Mass.
``When you look at one-year increments, it is really hard to figure out who is good or bad,'' he said. ``You have to look at what is being done tactically each year, because executives are not necessarily managing to Wall Street's expectations.''
With three- to five-year periods, ``you at least get to see some patterns,'' Coleman said. ``But there is no way of actually truly measuring [compensation]. We confuse it and complicate it by giving executives stock every year, and who knows at what point in time you should compare [stock and compensation]. How and when you value stock as a grant is a question that can be endlessly debated.''
Some expected new disclosure rules, effective for the past two years, to change the way companies approach executive pay. But that has not been the case — except in the area of perquisites.
``There has been no dramatic shift in how companies assemble pay packages and salary levels,'' said Alexander Cwirko-Godycki, research manager with Equilar Inc., an executive compensation research firm in Redwood City, Calif. ``I don't think it has changed how companies design compensation packages for executives. Companies are trimming the fat, but certainly not cutting compensation packages in half.''
What's more, if stock prices go down, it can have ``a severe impact on executive wealth and that is not reflected in the proxy statement,'' said Joe Mallin, managing partner in Pearl Meyer & Partners LLC's Atlanta consulting office.
Despite the fuzziness surrounding pay, corporate efforts to align it with performance are on ``an upward curve — but not a steep curve,'' said Paul Hodgson, a senior research associate at the Corporate Library in Portland, Maine.
``Executive pay is increasing, driven by stock option grants in the past. But there should be less likelihood of this occurring,'' he said, as more companies shift to performance-based long-term incentives that also have time-vesting restrictions and requirements.
Still, Hodgson is apprehensive because of existing high levels of executive compensation and because of how targets are set. ``My concern is that many are floored below median performance. If you haven't managed to perform to at least half your peers, why are you getting an incentive award?'' he asked.
Dennis Gros, president of Plastic Jobs by Gros Executive Recruiters in Brentwood, Tenn., agreed: ``My suggestion is that you set forth an absolute mandate that if the company doesn't do well, the chief executive and other members of the executive team don't get their incentives,'' Gros said. ``When you are losing money and giving a six- or seven-figure incentive to a CEO, what are you thinking? That is ridiculous and absurd.''
Yet, overall compensation for the highest-paid CEOs in the largest publicly held plastics firms is significantly lower compared with median CEO compensation for S&P 500 firms.
Only Magna International Inc. co-CEOs, Siegfried Wolf and Donald Walker — with 2007 pay levels of $9.8 million and $9.4 million, respectively — had compensation above the S&P 500 median of $8.8 million, as calculated by Equilar. Newell Rubbermaid Inc. CEO and President Mark Ketchum, at $8.4 million, was a shade below the S&P median, even though his company's one-year TSR was minus 8 percent.
The average total compensation of PN's 150 top-paid executives — at $1.4 million — is almost six times higher than the average $180,000 package of their executive counterparts at plastic companies with sales of roughly $50 million, based on random data sampling from Gros Executive Recruiters.
Looking ahead, Jim Aslaksen in the Chicago office of Korn/Ferrry International, doesn't see compensation growing much when 2008 numbers are calculated. In fact, if one-year incentive payments for 2008 end up 10-25 percent lower than 2007 levels, Aslaksen said he will not be surprised.
``The net net is that people have had it good the last few years,'' said the global sector leader of Korn/Ferrry's performance materials practice. ``What happens next depends on the type of compensation plan that is in place.
``I expect bonuses in 2008 will be down from 2007, and flat from 2008-09, because net income will be down and executives are not going to cash in stock options,'' Aslaksen said. ``If raw material prices for plastics companies drop, bonuses could shoot back up. But I don't expect that.
The influence of the economy on incentive-plan payouts underscores a problem in how executive pay is set, he said.
``Most reward systems are set up around growth year-over-year, quarter-over-quarter,'' Aslaksen said.
``Yet the job of managing is more difficult during a downturn, so performance is going to outweigh the pay because of the complexity of managing a business in this type of climate. So executives are not rewarded as much as they should be during down economic times,'' Aslaksen said.