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Merit Raises in 2003: Smallish

Average company will offer exec merit raises of 3.5 percent, survey finds. Most bonuses below target, as well.
Lisa YoonMarch 17, 2003

The stalled economy has meant downwardly revised earnings guidance for many companies. But it appears another kind of lowered earnings expectation is hitting executives much closer to home.

According to a survey of 178 businesses conducted by human-resources consulting firm Hewitt Associates, two-thirds of the respondents are giving executives merit increases of less than 4 percent this year. About nine percent of the companies polled say they’ll be given no merit raises in 2003. The median merit-increase budget for executives in 2003 is 3.5 percent, Hewitt found.

The same bad news goes for executive bonuses (based on 2002 performance). While bonus projections are no worse than last year’s levels, that’s not saying much — they’re still well below historical norms, according to Hewitt.

More than half (52 percent) of the respondents said bonuses won’t meet expectations (90 percent of target or les). Another third reported that bonuses will be less than 70 percent of targeted levels.

Interestingly, two-thirds of the surveyed companies are also making or considering changes to their long-term incentive plans. Thirty percent are restricting or planning to restrict eligibility for stock options at lower levels; 27 percent are looking to convert or have converted pay from stock options to “full value” share plans (such as restricted stock or performance shares); and 26 percent deliver or are planning to deliver lower compensation in long-term incentives.

Only 17 percent of companies surveyed indicate they will be granting larger stock option awards this year. Almost 40 percent of large cap companies expect to grant between 90 and 100 percent of last year’s options size. Another 17 percent projected granting between 70 and 90 percent of last year’s levels, while 13 percent indicated that their 2003 award grant will be more than 30 percent less than last year’s.

Change isn’t easy, as evidenced by the 50 percent of companies that foresee “significant challenges” in breaking the news to executives.

As for the shares corporates currently have left to grant, Hewitt’s study reveals that 57 percent of companies surveyed believe enough shares remain in the pool for several years’ worth of grants. The remaining respondents said their companies are planning to go to shareholders in the next few proxy seasons.

Many are also looking to reduce dilution from stock option grants. When asked about their anticipated stock option run-rate levels for 2003, 68 percent of companies said they would have a lower run rate than in 2002. Seventeen percent of companies projected a run rate of between 1.51 percent and 1.75 percent, which is consistent with the median run rate of the Fortune 100 in 2002, according to Hewitt. About a quarter of companies expect a run rate higher than 1.75 percent, while 44 percent project a run rate lower than 1.51 percent. Fourteen percent said it was too early to tell.

To consultants at Hewitt, smaller options grants plus lower run rates equals less-competitive packages. Apparently, that equation hasn’t sunk in for many companies’ compensation committees. “It’s interesting to see that … the majority of companies expect to grant options at … lower levels than last year, but also believe they will be utilizing a lower run rate,” said Hewitt consultant Tracy Davis. “It appears that some companies may not yet know the true impact that the combination of declining stock prices and a flat to lower run rate ultimately will have on both award sizes and the competitiveness of their equity incentive programs.”

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