Executive Pay Trends for 2010

Compensation experts Don Delves and head of the North American compensation consulting practice at Hewitt Associates Ken Abosch talk about how companies are dealing with the threat of greater government oversight of executive pay

On many fronts, 2009 is shaping up to be one of the worst years for aligning pay with performance in Corporate America. After bringing the world to the brink of economic disaster, major investment banks are planning to pay their people 30% more than last year in salary plus bonus. "Some [payouts] will be even higher," says Wall Street compensation expert Alan Johnson.

Some CEOs, like Michael Jefferies of Abercrombie & Fitch (ANF), are taking home more pay, despite the fact that their businesses have done so badly that their stocks have tanked and they have laid off many employees. And for the first time, many companies have slashed the salaries of rank-and-file employees. "That's historically been taboo," says Ken Abosch, head of the North American compensation consulting practice at Hewitt Associates.

The impression that Corporate America's pay practices are out of control has become so strong that the government has made the business of paying people its own responsibility. By the middle of October, the government's so-called "pay czar" will rule if the top pay packages for seven firms receiving significant amounts of federal rescue funds—including Citigroup (C) and General Motors—are inappropriate. The Federal Reserve is considering measures to curb pay at all financial firms to rein in risk taking. And members of Congress are asking companies that haven't received federal funds to reveal pay package details.

Talking to the Experts

Some smart companies have started to modify their compensation policies to get ahead of all of the negative attention. Already, "CEO compensation has fallen significantly," notes David Chun, CEO of compensation research firm Equilar. Sixty-four percent of the country's 100 largest companies have also implemented "clawback" provisions, requiring executives to return part of their pay under certain conditions such as malfeasance. This is up from only 17.6% in 2006.

But a lot more could be done. Consider this one telling metric: After the tech meltdown in 2001, CEO pay shrank by 14% in 2002. By contrast, in 2008 CEOs were paid only 8% less than they had been paid in 2007—during the grips of a much more severe and broad-based recession. By contrast, the pay schemes for average professionals have been altered in unprecedented ways. For example, many companies are abandoning base salary increases to rely more on individual bonuses as a cheaper way to encourage performance.

To better understand how the recession has transformed the pay landscape across the nation, BusinessWeek senior writer Emily Thornton recently spoke to two compensation experts: Don Delves, founder and president of executive pay consulting firm the Delves Group, and Ken Abosch, head of the North American compensation consulting practice at Hewitt Associates.

Below are edited excerpts from their conversations:

DONALD DELVES, FOUNDER AND PRESIDENT OF THE DELVES GROUP:

Have we seen any improvements in executive pay?

Corporate governance doesn't change overnight, so I don't want to rush and say that nothing has changed. There are some course corrections happening. Major money center banks and investment banks are at the center of the storm. But that group is very different and separate from the rest of the world. Most of Corporate America has taken the public's concern about executive pay very seriously. Ever since Sarbanes-Oxley, boards have been consistently improving their independence and oversight of executive pay.

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