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As the global financial crisis unfolds and economies sink into recession, non-executive directors and senior management teams are trying to come to grips with the implications. Currency fluctuations are wreaking havoc on global compensation strategies, and the potential for a deeper-than-anticipated recession is making it difficult to evaluate performance results and plan for the future. Steep declines in share prices raise valuation issues and weaken retention of key talent.
In the current economic turmoil, executive remuneration is in the spotlight. Governments in Europe and the US have imposed constraints on executive pay in organisations that have received capital infusions. Incentive plans are being blamed for encouraging and rewarding excessive risk taking. Shareholders, governmental officials and the public are in an uproar over the levels of executive remuneration at failing companies. The furor has even spread beyond the financial services sector. We may well see stricter regulation of executive remuneration in several countries, and we will certainly see a strong shareholder response.
To make matters worse, the situation is changing by the minute. Although companies are attempting to deal with potential problems before they escalate out of control, it is still easy to overreact in a volatile environment. While the crisis started in the financial services sector, organisations in other sectors are substantially downgrading expectations for performance in 2008 due to a variety of factors, including high input cost inflation, reducing demand, difficulties accessing capital, and reduced consumer confidence.
This environment has dramatic implications for executive reward programmes and talent strategies, as well as near-term pay actions.
Several issues are surfacing at once:
In this Perspective, we first discuss considerations for assessing the appropriate magnitude of incentive awards.For many organisations that deliver long-term incentives to a targeted value, this year presents a conundrum of balancing delivery of competitive pay with the potential for a dramatic increase in the number of shares required. Second, we provide our views on considerations for evaluating the balance of long-term incentives for the 2009 grant as near-term action. These actions may reflect a short-term fix for current issues. We anticipate that companies will be taking a hard look at their long-term incentive programmes and reward strategies in 2009 in order to develop more systematic responses.
Managing executive remuneration in an economic downturn
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