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Why Companies Fear Restoring Executive Pay Cuts?

While restoration of employee pay cuts is on the rise, reversal of executive pay cuts is still on hold. Thanks to the strong sentiment against the alleged outrageous executive pay, the Ken Feinberg factor and the slow pace of economic recovery, compensation and pay analysts think companies are playing safe at the moment by maintaining silence over executive pay cut reversals.

Although many companies have restored employee pay cuts, none of them are contemplating to reverse executive pay cuts. Thanks to the strong sentiment against the alleged outrageous executive pay, the Ken Feinberg factor and the slow pace of economic recovery, compensation and pay analysts think companies are playing safe at the moment by maintaining silence over executive pay cut reversals.

According to a survey of 187 companies with over $4 billion in revenues by Watson Wyatt, an Arlington, VA based global consulting firm, despite the impending economic recovery, 63 percent of companies are currently not planning to reverse or restore changes made to executive salaries in the next six months.

“As they prepare for continuing increased public scrutiny of executive pay, many are avoiding further short-term changes and focusing instead on longer-term shifts toward better pay-for-performance and assessing their compensation programs within the new context of risk management,” the survey release said.

According to the survey fewer companies are considering short-term changes such as reducing salaries (2 percent are considering it now, compared with 10 percent in March). The survey also found that a vast majority of employers (92 percent) are not planning to reduce bonus opportunities or eligibility requirements.

However, approximately three in 10 companies are raising performance goals relative to this year’s actual performance (29 percent) and changing metrics (31 percent) in their annual incentive plans. Four in 10 (39 percent) of companies have changed or plan to change long-term incentive vehicles. Of these companies, 42 percent plan to put more emphasis on performance-based shares and 25 percent on performance cash plans.

Experts believe reluctance of companies to restore executive pay cuts can be attributed to the sluggish economic recuperation and the fear of reprimand from Washington and the shareholder groups.

Speaking to CE Online, Ira Kay global director of executive compensation consulting at Watson Wyatt said that companies’ reluctance to restore pay freezes could be a function of slow economic recovery. “The outlook may be improving, but companies are not out of the woods yet and still closely managing costs,” she said.

Additionally, executive pay analysts also believe that Obama administration’s Pay Czar Ken Feinberg’s persistent resolve to rein in executive pay at firms on taxpayer life support has also discouraged companies from taking up executive pay cut reversals. As advised by the Pay Czar, the Treasury Department has devised a plan to slash annual salaries of the 25 highest-paid executives at the seven companies that received the most from the Wall Street bailout by an average of 90 percent from 2008 levels.

 Ira Kay thinks companies’ won’t restore executive pay cuts before they do so for other employees. “Companies are also highly mindful of the public backlash over excessive executive pay, so unless they reverse employee pay cuts, they cannot think of the executive pay cut revision” she told in an interview to CE Online.

Companies such as AMD, American Express, GM, Seagate Technologies and FedEx are some of the companies that have announced reversal of pay cuts to employees.

Commenting further Ira Kay pointed out that the companies’ are adopting a wait and watch approach on reversal of executive pay cuts till the government and its allied agencies bring in the proposed legislative reforms on executive pay.

“Given the new SEC and legislative proposals, companies may also be taking a ‘wait and watch’ approach. Companies understand that there may be a series of changes coming over time and not at once, so they are keeping mum on the reversal of executive pay cuts at the moment,” Ira Kay remarked.

94 percent of companies expect more scrutiny of executive pay in the next two years as a result of new legislation, Securities and Exchange Commission regulations and public pressures, with almost three-quarters (72 percent) expecting the relationship between pay and performance to improve. Sixty percent of companies reported having little concern regarding possible say-on-pay requirements.

Majority of respondents appear to be already taking steps by improving their Compensation Discussion and Analysis (CD&A) to explain pay program rationale and appropriateness to shareholders (70 percent) or identifying potential executive pay issues/concerns in advance (67 percent).

Almost half (42 percent) of companies are concerned about potential legislation assessing executive pay for “excessive risk.” Most companies have taken action to address the issue of risk: 54 percent have or plan to add a formal risk assessment process, up from 30 percent in March; 50 percent have or plan to certify in the proxy that a risk assessment has been performed, up from 31 percent in our March survey.

Meantime, another survey from Watson Wyatt revealed increasing number of employers are restoring salary freezes to their employees. As against their own findings in August, Watson Wyatt survey released this week said half of the surveyed companies that froze salaries and hiring in the past year, now plan to unfreeze them in the next six months.

According to the survey, more than half (54 percent) of employers that froze salaries plan to unfreeze them within the next six months, a sharp increase from 33 percent in August and 17 percent in June. Almost half (49 percent) also plan to reverse hiring freezes at least partially in the next six months, compared with 38 percent two months ago.

About fayazuddin a. shirazi