AKRON, OHIO (Sept. 13, 1:10 p.m. ET) — Compensation experts agree that executive pay will increase again in 2011. But they are divided on whether that increase will be a small one, or one that is on the same magnitude of the 20 percent increases that were commonplace in 2010.
“That's a tough question given the big market correction we just went through” in August, said John Ellerman, founding partner of Pay Governance LLC, who works out of the company's Dallas office. “Up until then, most companies thought 2011 would be a fairly good year with bonuses equivalent to 2010.
“But the fact that shareholders lost so much money” — at least on paper — during that market correction — could change that, Ellerman said. “No one knows if “we are at the end of that correction yet.”
“So much depends on what happens between now and the end of the year,” agreed Andrew Goldstein, a Chicago-based practice leader for executive compensation at Towers Watson of New York. “Bonuses will be below budget in 2011, but they will still be up and long-term incentives grants will be up as well, although not as steep as annual bonuses.
“I expect that when we see 2011 data, we will see LTI up again over 2010, in the neighborhood of 5-10 percent, attributable to stock gains,” Goldstein said.
That's much the same view as Mick Thompson a principal in the human capital consulting business of New York-based Mercer Inc. “It's really tough to say, especially relative to annual incentive plans, because there is a lot of 2011 left and a lot of uncertainty in the market,” Thompson said. “But I think they will likely pay out at target or just above target.”
Aaron Boyd, research director for executive compensation research firm Equilar Inc. in Redwood Shores, Calif., said: “For 2011, the crystal ball gets a little murky. But I suspect that pay will be flat, or even a little down, because we saw such a big increase in 2010 over 2009.”
However, James Reda, managing director of James F. Reda & Associates LLC in New York, thinks 2011 will be another strong pay year for executives. “A lot of pay is pegged to [earnings before income, taxes, depreciation and amortization] and EBITDA is not going to change that much in the next six months,” said Reda. “I don't think everything will fall off like it did in 2008 and 2009. So I think companies will meet goals and have a decent short-term and LTI payout.
“I don't know of many companies that dialed in an aggressive growth for 2011, so 2011 will probably not be a bad year for LTI and annual pay,” he said.
Regardless, executive pay packages will continue to rise — even if worker pay levels remain flat or stagnant, said Deb Nielsen at Kenexa Compensation of Wayne, Pa.
“The average worker is just not going to see much increase in salary. Absolutely not,” she said. That's because, in the eyes of the corporation, workers “have less control over results.”
Conversely, overall executive pay packages will continue “at high levels and continue to increase,” said Nielsen, who is Boston-based director of data operations and executive compensation for Kenexa, which late last year acquired salary.com.
“Companies fear that if they don't offer the right package, it will put the company at a competitive disadvantage” in retaining or attracting the right person either to “turn the company around or drive performance.” Nielson said.
“You are not going to see them back away from an executive for a few extra dollars.”
That means there will continue to be disconnects between annual incentive payouts to executives for one-year performance and total shareholder return.
Just one example: In 2010, Mega Brands Inc. President and CEO Marc Bertrand received a non-equity incentive plan payout of nearly $480,000 when the one-year total shareholder return declined by 38 percent.
On the other end of the spectrum, TSR at packaging firm Winpak Ltd. jumped 30 percent from 2009-10, but none of the executive team received an NEIP payout.
Overall, 21 companies in the PN rankings posted positive one-year TSR in 2010, ranging from 3-222 percent, with nine firm posting one-year TSR declines of 3-60 percent. One-year TSR numbers were not available at the other five companies.
Three-year TSR was a different story, with 14 firms posting a positive return of between 1 and 41 percent, 15 posting negative three-year TSR of between 3 and 53 percent and one firm showing a flat TSR over three years. Again, three-year TSR numbers were not available for the same five companies.
Most PN-ranked executives profited financially from their firms' one-year corporate performances — as 115 of the top 150 executives received NEIP payouts in 2010, with 17 of them at $1 million or more. That compares to 2009 when 108 executives received NEIP payouts, with just 14 of them over $1 million.
As a result, both the average and median NEIP payouts jumped in 2010. The average NEIP payout in 2010 increased 157 percent from just under $332,000 in 2009 to more than $856,000 in 2010 — though mostly because Magna International Inc. execs, particularly Chairman Frank Stronach, took home huge profit-sharing bonuses. The median NEIP payout for the PN top 150 executives in 2010 rose by 26.8 percent to $195,390, from $155,611 the year before.