A recent report examines expected changes to pay plans and practices. Moody’s Global Corporate Governance report found the following:
- Pay-related changes will put new incentives in place for management and affect employee recruitment and retention efforts that could have significant future implications for bondholders.
- Analysts expect pay-related scrutiny to be focused most heavily on firms most closely associated with the credit crisis, including those receiving government assistance, those who have exhibited poor pay practices in prior years, or both.
- Expected key compensation changes include: a reduction or elimination of 2008 bonuses; changes to performance targets and metrics used in both short and long-term incentive plans; modifications to equity-based incentive plans; and other changes resulting primarily from shareholder pressure.
- Given the focus on pay, the pressures on various pay elements – in particular on variable compensation, which represents roughly 85% of typical CEO pay – and the reduced likelihood of near-term stock market recovery, we expect median CEO total pay to decline for the 2008 fiscal year and possibly again in 2009.
- There are both benefits and potential risks stemming from the pay changes, including those applicable to TARP firms under the Stimulus Act; potential credit implications are unknown at this time since pay is very much contextual and must be analyzed on a case-by-case basis.
Board compensation committees are under the microscope as investors, the media, and the government are reeling from the economic fallout affecting companies in all industries.
Firms that are to experience the most scrutiny, according to Moody’s:
- firms most closely associated with the credit crisis (financial firms, banks, homebuilders, etc.). Firms receiving government assistance will be under the most scrutiny and now must comply with specific pay restrictions (see box);
- firms who have not shown restraint or who have exhibited poor pay practices in prior years, in particular if they have also significantly underperformed compared with peers; and
- firms falling in both groups.
Retooling plans to retain and reward key executives will be among the biggest concerns for firms in 2009. Boards are also face the consequences of changing compensation plans. The more boards fail to “get it right,” the more likely they will face negative press and pressure from activist shareholders.
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