Wall Street Bonus Reform Spills Over Into Other Sectors

In 2009, CEOs had an even worse year than they did in 2008. Equilar, an executive compensation research firm, published a report today that found chief executive pay down around 13% in 2009 versus 2008. That might come as a surprise: in the second half of 2009 the U.S. economy wasn't technically in recession, but it was for all of 2008. The report explains that Wall Street may be to blame: the public's insistence that lofty discretionary bonuses should be rethought influenced boardrooms outside of finance.

First, there's the shrinkage. This chart from the report tells most of the story:
Equilar exec comp 2010 rpt.PNG
For performance and discretionary bonus payouts, the declines shown are 10% and 21%, respectively. You can begin to see a shift already: performance is being given more weight. The report also asserts that more market uncertainty has made performance bonus payouts more difficult. If you can't be sure that a firm's annual performance will reflect long-term viability, then it's harder to determine how much you should pay an executive based on this year's performance.

Trends in Performance Metrics

There were also several specific performance metrics Equilar saw gaining popularity in 2009. Here are some highlights:

Additional Holding Periods

More executives are being forced to wait for an extended period of time before collecting their bonus. This is likely a characteristic of firms recognizing that when economic cycles climax they sometimes skew how well a company is actually doing. Since clawing back a bonus once it has been given is generally pretty difficult, a holding period can ensure money won't be paid out prematurely if things go bad.

Multiple Metrics

Performance-based pay is also taking more variables into account. This is another seemingly sensible evolution. A good CEO maximizes profit, but a great one helps usher success into all aspects of firm culture and competitiveness. As firms increasingly develop multifaceted strategies that extend beyond just making as much money as possible, utilizing additional metrics will help to evaluate performance.

Shift to Equity

Another probable result of the Wall Street bonus fallout -- CEOs are increasingly accepting stock awards in lieu of more cash. And they should be: if your compensation is mainly in firm equity, then you have an even stronger motivation to ensure the firm does its best. CEOs should have a lot of their own skin in the game.

I think all of these trends are good ones. Despite the bad press of Wall Street pay over the past few years, incentive bonuses are generally a good idea. They just need to be structured properly. This extends beyond finance. The new metrics that Equilar cites appear to be a step in the right direction.