Compensation Trends Post 9/11 (updated, February 2004)

The business world has endured many shocks recently. In the few years, we have witnessed the burst of the high tech bubble, the attacks against the World Trade Center in New York on 9/11, the failures of Enron and WorldCom, SARS and mad cow disease. Add to this mix the war in Iraq, and the picture emerges of continued uncertainty for the business world.

Some of these events have led to reduced levels of trust in senior management, corporate directors, and in accountants, auditors, and investment advisors, resulting in the crisis of confidence in the stock markets. Paradoxically, the need for experienced leadership, to navigate these complexities, is at an all-time high.

This crisis of confidence will result in systemic changes to the way organizations approach corporate governance. Corporate governance is receiving, and will continue to receive, much attention. For example, Canadian securities regulators are requiring publicly listed corporations to provide better links between executive compensation and corporate performance. Wise organizational leaders will to consider and tackle these issues, some of which will require substantial changes to their corporate governance practices.

Compensation trends reflect the market uncertainty since 9/11. In 2003, corporations forecasted increases in their 2004 non-union base salary budgets by approximately 3.2%. Approximately 8% of corporations planned salary freezes, a higher than normal percentage.

Increasingly, organizations are looking to incentive plans as an important component of their rewards strategy. More employers than ever before provide incentive plans to employees, and on average, pay 9.9% of payroll in incentive awards. As discussed earlier in this article, securities regulators are also looking at this issue.

The importance of improving the objectivity of incentive plans is high. Bonuses as a percentage of base salary range from 5% for non-management positions to an average of almost 15% for middle management positions and close to 50% for senior executives. Therefore, the cost to an organization of an ineffective incentive plan can be very high.

The events of the past several years have also caused increased levels of stress in the workplace. The uncertainty in the stock markets has caused pensions and savings to drop in value, causing anxiety, especially in employees close to retirement. In addition, employees are required to work harder as organizations have decreased the size of their workforces. It has been documented for several years that employees value the flexibility to telecommute, and take time off to care for children and elderly parents. These trends have highlighted the importance of benefits in addressing some of these personal and workplace stresses.

While the importance of benefits as a component of the compensation package has increased, the importance of stock options has decreased. Many organizations are revisiting their stock option plans, especially stock grants. Decisions on how to account for stock options will influence an organization's compensation policy. The debate on accounting for stock options continues and will affect its importance as a compensation tool in the long term.

Copyright, PeopleLink Consulting Inc., 2004. All rights reserved.