Under Scrutiny, Companies Revamp Executive Pay

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Chief executive officers at the 100 largest public companies in New England enjoyed particularly generous compensation packages in 2004, a survey by DolmatConnell & Partners, Inc. revealed.

Total compensation for those CEOs increased by 44.8 percent in 2004, which is twice the return the companies provided to shareholders, a Business Wire report stated.

"The survey shows that there's still not a close enough link between pay and performance," DolmatConnell President Jack Dolmat-Connell said in a prepared statement. "At many companies, CEO pay increases far outstripped performance gains. And at companies where performance went down, CEO compensation didn't."

Another survey suggests that may be changing, with companies focusing more intently on CEOs producing results over the long term.

Scrutiny from shareholders, combined with the anticipation of mandatory stock option expensing, is leading many companies to change the way they pay their top executives.

Many companies (43 percent) are moving away from stock options and offering more restricted stock and performance-based shares/units (33 percent), according to a survey by Hewitt Associates. In addition, 35 percent of companies are limiting the number of employees eligible for long-term incentive plans.

"As corporate boards come under increasing scrutiny from shareholders and regulators, they're shifting more executive pay to performance-based equity, which has a greater focus on long-term results," said Tracy Davis, senior consultant for Hewitt Associates, a human resources services firm. "Moving forward, we expect this to have a major impact on executive earning potential, as a growing portion of their pay will be determined by their success in achieving long-term business goals and how well they meet shareholder expectations."

Hewitt's survey reveals that 2005 executive base pay increases are similar to last year - more than 70 percent of companies gave increases of less than 4 percent. As for executive bonuses, more companies (68 percent) are awarding at or above target this year (for 2004 performance), compared with last year (46 percent). Specifically, 47 percent of organizations are paying between 100 percent and 149 percent, and 21 percent of companies are paying 150 percent or more of targeted bonus, the study said.

The Hewitt study is based on 117 companies with a median market cap of more than $11 billion. More than half of these are Fortune 500 companies.

DolmatConnell, which based its survey on 2005 proxy statements, shows that the value of long-term incentives increased 16.6 percent. Compensation committees are working to create stronger links between pay and performance, but many issues need to be addressed, the company said, including “how pay levels got to where they are, how comparative peer groups are being defined and how performance targets are set.”

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