In a recent Perspective, Managing executive remuneration in an economic downturn, we examined various strategies for dealing with the current economic environment and discussed how to manage 2009 equity grants in light of depressed stock prices. Along with this challenge, companies face broader considerations with their executive pay programmes. They want to ensure that their programmes are effective during this time of uncertainty when equity markets are experiencing unprecedented volatility, and the performance outlook for many companies is unpredictable.

Some shortcomings in executive remuneration programmes have been exposed in this extreme time. With recent performance volatility, executive rewards that had been thought to reflect underlying performance are now being questioned. For example, the leverage of stock option compensation has been dramatic – tremendous value has been created and lost very quickly, calling into question performance links. The connection of compensation actions to the risk of performance results is, in many cases, unclear. Performance has been rewarded, but is it sustainable? Shareholders facing large equity losses in the face of significant executive compensation payouts may call for changes to programme design or pay mix. Intermediate-term performance plans continue to emerge as a core component of senior executive pay, but goal setting is a challenge. Finally, during the economic slowdown, companies will be pressed to examine their total rewards spend; thus, fundamental questions surface about the right people getting the right rewards.

In this Perspective, we take a step back and consider how executive remuneration programmes should be designed to address these shortcomings. What specific problems have been revealed by the current economic crisis, and what are the implications for executive remuneration going forward?

As we look to the future of executive remuneration, four key steps emerge:

• We believe there will be a renewed call for balance in executive remuneration delivery – including a more balanced focus on retention and reward, a more holistic approach to performance metric selection and target setting, and more evenhanded use of short- and long-term compensation elements.
• Companies will rethink the relationship between risk and reward and, in particular, look for ways to ensure that rewards reflect sustainable performance results so that excessive risk- taking is not encouraged.
• With rewards resources scarce, differentiation of key contributors through rewards and career opportunities will be even more critical.
• Companies will look for ways to apply the concept of segmentation to compensation actions and maximise the return on limited rewards dollars. 

Following is a detailed exploration of each of these actions. We identify the guiding principles and specific design elements that should be considered to support the development of fair, reasonable and effective executive pay programmes. While the evolution most certainly will be a multi-year process, companies that embrace best-practice trends early will be in a better position to withstand shareholder scrutiny and proactively address the future challenges that might arise from a prolonged economic downturn.