"Compensation programs are being impacted by a number of issues, from an improving economy to changing tax and long-term capital gains and dividend rates," observes Ken Cameron, a director in the compensation and benefits consulting group at Grant Thornton in Atlanta.
As soon as the new tax rates were announced in the American Tax Payer Relief Act of 2012 (which became effective Jan. 1, 2013), compensation committees and management of companies across the United States began reviewing how these changes would alter their organizations' compensation programs.
Use of deferred compensation and increasing the value of the stock component may be top of mind as these programs are redesigned to maximize value.
Cameron sees a continuing focus on compensation program "optics" as various constituents--such as shareholders and the media--express their opinions regarding the amount and design attributes of compensation. Because "say on pay" legislation has enabled a louder voice for constituents, companies should ensure that these programs tightly align compensation with performance.
Say on pay has also given significant prominence to shareholder advisory firms such as Institution Shareholder Services Inc. (ISS) and Glass, Lewis & Co. that have a growing influence and are driving discussions of program design, communication and value.
As organizations conduct compensation planning and program design, there are certain best practices that financial executives should consider:
* Ensure a well thought-out and documented compensation philosophy to support consistent and effective decision-making;
* Maintain a strong governance structure through the board and management team;
* Ensure there is a strong alignment between pay and performance;
* Implement risk-mitigating procedures (including an appropriate balance of fixed and variable compensation, stock ownership guidelines and clawback policies); and
* Keep up with the latest compensation benchmarking information to understand what is happening in the marketplace.
Current benchmarking information can be found in the 2013 Financial Executive Compensation Survey, which was just published by Financial Executives Research Foundation (FERF) and sponsored by Grant Thornton. Now in its seventh year, this annual survey presents responses from financial executives regarding their salaries, bonuses, long-term incentives and retirement benefits.
Public & Private Company Comparison Average Base Salary--All Responses...