AKRON, OHIO (Sept. 13, 12:35 p.m.) — Through 2010, executive compensation for the highest-paid senior officials in the plastics industry was affected by the economy, the anticipated impact of Dodd-Frank reform and, quite obviously, specific performance of individual companies.
A key trend for executive compensation is the shift toward performance-based pay rather than fixed compensation.
According to several sources, performance is driving compensation paid out. Especially since the Great Recession, companies are leaner and stronger but require more of top-level managers who are responsible for more in their portfolios. Talent is pretty thin and so with demands ratcheted up, that makes the talent even more rare that can handle such a load, according to officials with Korn/Ferry International in Houston.
“Compensation is becoming more and more metric-driven,” said Andy Talkington, senior client partner with Korn/Ferry, in a recent telephone interview. The stress that the industry experienced during the recession uncovered key talent.
“During a very difficult and challenging market time that we went through, it caused boards to recognize talent that they have and make it difficult for them to leave,” he said. “We've seen a trend, clearly, for those that had it, certainly putting in retention programs for those [key managers].”
Overall compensation figures came as no surprise to industry experts, including the increase in payouts for non-equity incentive plans.
“It's what I would have expected as far as payouts going up,” said Aaron Boyd, research director at Equilar Inc. of Redwood City, Calif. Boyd oversees Equilar's calculations for Plastics News' executive ranking. “NEIP payouts have been up quite a bit.”
Boyd has seen a trend nationwide of cash bonuses up over 40 percent. For 2008-09, these were consecutive years of pay decline.
“The fact that it's rebounded this year is not a huge surprise,” he said. “Companies are starting to hit targets, and starting to see growth.”
The rebound, in fact, took some by surprise. The pace of the recovery was better and greater than what most people had expected going into the beginning of 2010, said Andrew Goldstein, a practice leader in the Chicago office of New York-based Towers Watson. People were surprised in terms of the pace of the rebound. Companies set goals expecting a modest rebound and instead wound up with a bigger rebound.
NEIP payouts were above the norm in year-over-year percentage increase, Goldstein said.
“It's all attributable to the rebound and severe recession that we were coming out of,” he said. “In 2009, bonuses were very, very low and in some cases, zero.”
Designing the package
Compensation package design is more thoughtful and purposeful, especially as boards look to assuage shareholders, according to several officials.
Companies take pay plans seriously, said Equilar's Boyd. Overall, design has stayed relatively stable over the past few years, according to Equilar's “S&P 500 CEO Pay Strategies Report.”
But notable changes took place in 2010, including options becoming a smaller part of the mix, while stock-based awards and bonus payouts became larger pieces of total pay, according to Equilar's report.
For the plastics industry's top brass in PN's ranking, NEIP payouts were about 26 percent of total compensation, excluding Magna International Inc.'s six officials. (With Magna, whose executive compensation tends to inflate PN's numbers, the NEIP percentage rises to 38.) Stock awards for those same 144 executives represented 21.8 percent of the total, with options at about 14 percent.
At PolyOne Corp., Chairman and CEO Stephen Newlin received total pay of $6.9 million with a salary of $860,000, NEIP payouts of $3 million, stock awards of $967,589 and options of $850,590.
In its proxy, PolyOne directly addressed compensation. The Avon Lake, Ohio-based firm reinstated salary adjustments in 2010 after freezing base salaries during 2009. All executives except its CEO received salary adjustments in 2010. Instead, PolyOne's compensation committee increased Newlin's target annual incentive opportunity from 100 percent to 110 percent to leverage his variable compensation opportunity by placing a greater portion of his pay at risk.
PolyOne officials addressed the state of the economy and how the firm reacted. In 2010, each of its business platforms reached record-setting levels of operating income or profitability, sales climbed 27 percent, its stock price increased 67 percent and diluted earnings per share rose 252 percent. Overall operating income was 121 percent higher than the year before.
PolyOne officials said the company is doing more to compensate executives based on performance and shareholder interests.
“We, too, have seen the shift over the last couple years toward more formulaic, metric-driven bonus or incentive plans,” said Goldstein of Towers Watson. “It's focused on types of measures or metrics along the line of working capital, returns on investments, [earnings before interest, taxes, depreciation and amortization], top-line revenue growth, profit growth, cash flow, and the last category of metrics which is probably the one that has gained the most popularity — total shareholder return.”
Year of Dodd-Frank
Several experts called 2010 “The Year of Dodd-Frank.” According to Equilar, the sweeping financial legislation was the hot topic for compensation professionals last year. The 2,300-page document of new rules and guidelines set new challenges for companies and regulators.
It's the say-on-pay component of Dodd-Frank reform that has had the most impact, experts say. 2011 has been the first year in which firms had to have shareholder votes on executive compensation.
Speaking in terms of companies in general (not specific to plastics), one source said that average shareholder vote has been about 90 percent in support of executive pay programs.
“There are only about 40 companies [among thousands] that have failed to get a majority vote from shareholders supporting their executive pay program,” said Goldstein.
“By and large, one could conclude that shareholders are, overall, satisfied with how companies are managing their executive compensation. The critics were anticipating a terribly loud drumbeat for dissatisfaction. But by and large that has not happened,” he said.