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Exec Comp Revamped as Boards Think Short-Term
10/01/03
Board Alert
COMP COMMITTEES are setting their time horizons shorter than they used to be. They’re reducing the life of stock options, adding mid-term incentive plans to emphasize shorter performance measures and reducing the length of their stock compensation plans.
Trends in exec comp, regulations- such as accounting standards- and what’s generally accepted by the investing public are changing rapidly. Comp committees don’t want to be locked into a comp plan that is no longer appropriate five years down the line.
“Most companies that still have five-year plans are finding that they don’t make sense,” Paul Dorf, managing director of Compensation Resources. “Three years is about as far out as you can pontificate and hypothesize.”
The comp committee as General Mills, for example, decided this year not to present a five-year equity plan to shareholders. Instead, the board presented a two-year plan. General Mills says its shorter plan is about “maintaining flexibility given the current dynamic nature of executive compensation practices.”
“At two years in duration, the proposed 2003 Stock Plan would be, (by far) the shortest authorization in place for any company stock plans have been designed to endure for three to five years.
General Mills’ move comes as part of a long-term reorganization of its comp plan, spurred by shareholder concerns that the company’s overhang was too high.
Shortening equity plans does have a downside. It means companies will have to go back to shareholders more frequently for approval. That can cause administrative difficulties.
Comp consultants report that many boards are reevaluating their comp programs, in other ways, too. In the past, long-term plans traditionally ran for five to seven years. Nearly one third of all companies now have medium-term plans in place, according to Watson Wyatt.
Earlier this year, Microsoft instituted a new incentive plan that pays out if the company meets customer satisfaction goals over a three-year period. For its part, Deer & Co. has a new plan that pays out based on four-year results.
The idea behind mid-term incentives is to get execs focused on the sweet spot between short-term performance that can be manipulated or anomalous and long-term plans that are so far off the radar screen that the y do little to motivate employees’ immediate decisions.
Another factor contributing to the shorter length of incentive plans is the tough employment market. Many comp committees justified longer-term plans in the past as a way to keep top executives from jumping ship. With fewer jobs available, that rationale is less important.
That’s one reason Buck Consultants is recommending that its clients shorten the length of their incentive plans to three years.
Most option grants had 10-year terms. Now, comp consultants say, seven- and eight-year terms are becoming more common. “I’d say at least 25% of companies have shifted,” says Diane Lerner, of Watson Wyatt.
Shortening the term of an option grant is one way to reduce its expense, which is important now that more companies are expensing options. Under the Black-Scholes, the cost of an option decreases along with its term length.
“Everybody’s had to runs done by the staff about what this would do to the accounting,” says Michael Boskin, who chairs the Oracle comp committee.
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