Competitiveness of Compensation Packages Tops List of 2018 Executive Compensation Priorities

September 12, 2018 Shawn Hamilton

2018 has been a busy year — in addition to dealing with external changes, such as the impact of the new tax law, you have had to come to grips with shifting priorities, all while doing your day-to-day work. How do you know if you’re focusing on the right priorities, asking the right questions, and moving the needle where it matters most? Aon’s recently released 2018 Hot Topics in Executive Compensation survey provides executive compensation professionals a pulse on what’s on the mind of other professionals in the field so you do not feel like you’re on an island. By staying connected to these leading indicators of themes and trends, you can make necessary changes to ensure your plans remain competitive.

Top Priorities We're Discovering

We asked participants to identify the top priorities their organizations have been facing in 2018, as well as what they believe to be their executives’ perceptions and primary concerns related to their existing compensation programs.

Figure 1 outlines some of the key themes and findings we’ve extracted from this year’s survey that you should know about.

The competitiveness of targeted total compensation packages emerged as one of the most prevalent priorities organizations are addressing this year. Note how the competitiveness of their program compared to the external market jumped from being a priority for 57% of companies last year to 85% this year, a notable increase.

Another top priority coming out of this year’s survey, with a significant year-over-year increase, is the focus on aligning executive compensation to company performance. It seems that all companies struggle with this issue every few years. Companies sometimes make decisions early in the year on equity awards that may look out of alignment with the eventual company performance by the end of the year. With say-on-pay and shareholder advisory groups providing scrutiny on pay for performance, companies must continue to work on alignment of performance to pay.

Other Key Findings

Salary Increase Dispersion: On the base salary front, increases were 3% at the median. Interestingly, year-over-year the 25th and 75th percentile levels increased and decreased, respectively, so that the spread was much closer to the median. Despite the dispersion of salary increases being lower, short-term incentive plan payouts were higher overall year-over-year, while long-term incentive payouts were higher in 2017 than they were in 2016.

Tax Law Changes: This year we asked what changes are being made as a result of the new tax law and its impact on executive compensation. Only a small number of participants (8%) have made changes to their incentive compensation plans for 2018 due to tax reforms and the elimination of Section 162(m). Of those that have made changes, survey participants report removing 162(m) plans, changing LTI metrics, and increasing employee eligibility for variable compensation plans.

Shareholder Activism: We also asked about shareholder activism and what impact, if any, it’s having on companies. Only a small number of this year’s survey participants (14%) say they have encountered issues with activist shareholders in the past. Of those companies that have been a target for activists, they report making changes in program design that are ongoing (43%), changes in leadership (23%), and changes in board leadership (10%).

Clawback Policies: Although the rules under Dodd-Frank have not been finalized, we would have expected to see clawback policies in place at most organizations in preparation for final rules. However, our survey found only 33% of survey participants have these policies in place.

Next Steps

Gaining a sense of what your top priorities should be can be a cumbersome, yet necessary, process. Understanding areas of focus for your peers and competitors can help you identify and evaluate your own priorities for the remainder of 2018 and going into 2019.

Contact us to learn more about the survey or let us know if you have questions that our executive compensation consulting experts can answer. If you would like to participate next year’s survey, email me and I will make sure you receive notification when the 2019 Executive Compensation Hot Topics Survey is open. Participants will receive a free copy of the survey.

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