1. 19 May 2011
Executive Remuneration 2011:
Global trends
Will Ferguson, Los Angeles
Mark Hoble, London
Hans Kothuis, Hong Kong
Gregg Passin, New York
Lisa Slipp, Toronto www.mercer.com
2. Today’s speakers
Will Ferguson, moderator Gregg Passin
Los Angeles New York
+1 213 346 2240 +1 212 345 1009
will.ferguson@mercer.com gregg.passin@mercer.com
Mark Hoble Photo Lisa Slipp
London Toronto
+44 20 7178 5725 +1 416 868 7665
mark.hoble@mercer.com lisa.slipp@mercer.com
Hans Kothuis
Hong Kong
+852 3476 3817
hans.kothuis@mercer.com
Mercer 1
3. Agenda
Today’s landscape: Executive remuneration pressures around the world
Trends in North America, Europe and Asia Pacific
Panel discussion: How are global companies responding?
Q&A
Submit questions at any time:
Use the Q&A tab on the bottom
right-hand side of your screen
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5. The changing face of executive compensation
A global convergence of trends
Worldwide pressures
Supply and demand
Heightened scrutiny
Pay for performance
Pay levels
Clawbacks
Transparency
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6. Global observations and trends – 2011
Performance
With recovery and heightened scrutiny and transparency, pay for performance reemerges as an area of focus
Most critical challenges focus on lack of global leaders, developing leadership capabilities/skills, and lack of women executives
Remuneration
Base salary Annual cash incentives LTI Pay mix
– 2011 salary – Strong award leverage – Focus of delivering pay – US and Canada have
increases remain for performance heavier emphasis on short-
conservative with – Differentiation more alignment; practices vary and long-term incentives;
distinct differences by pronounced than in salary on eligibility Europe has stronger focus
geography increases on fixed pay and benefits;
Asia has heaviest emphasis
– Most firms target – Approaches vary by on short-term incentives
base salaries at market industry and or sales and least on fixed pay
median, but strive for models
differentiation by
individual performance
Governance
US joins other countries with say-on-pay
Regulation
Global financial services regulation continues
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8. Top trends in the US
Short-term incentives
After wild ride in 2008, less volatility, and expected good performance for 2010-11
Mercer 350 (2007 – 2009)
Actual STI Awarded as Percent of Target
175%
Estimated 2010 Percent of
150% STI Payout Respondents
125%
Maximum 11%
100%
Above Target 37%
75%
Target (+/-) 27%
50%
Below Target 21%
75th Percentile
25% 50th Percentile
25th Percentile
Below Threshold 4%
0%
2007 2008 2009
We expect to see continued steady results in 2011, although Comp Committees
We expect to see continued steady results in 2011, although Comp Committees
will remain sensitive to paying for performance coming out of the recession
will remain sensitive to paying for performance coming out of the recession
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9. Top trends in the US
Long-term incentives
The LTI story over the last few years is one away from options and towards
performance-based awards
Average Long-Term Incentive Mix ($ Value)
2005 2010
21%
35%
41%
52%
27%
24%
Stock Options
Restricted Stock
Performance Awards
Has the market found its equilibrium, or will it continue to move in the same direction?
Has the market found its equilibrium, or will it continue to move in the same direction?
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10. Top trends in the US
Long-term incentives continued
Most companies continue to use options, but as part of a portfolio
Awards with Stock Options (68%)
30%
2008 2010
26%
25%
25%
23%
20%
20%
17%
Percent of 15%
Companies 15%
13%
10%
10% 9%
7% 7% 7% 7%
6% 6%
5%
5%
0%
Options, Stock Options Stock Options Stock Options Restricted Performance Restricted No LTI
Restricted, and and Performance and Restricted Only Shares and Aw ards Only Shares Only
Performance Aw ards Shares Performance
Aw ards Aw ards
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11. Top trends in the US
Say on Pay
SOP Vote Results as of May 13 SOP Vote Breakdown
Number % % in Favor Number %
90%-100% 425 74%
Pass 554 97%
70%-90% 96 17%
Fail 17 3%
50%-70% 32 6%
Total 571
Below 50% 17 3%
Source: Mercer WRG.
Vote results are reported as votes in favor as a % of the total number of votes in favor plus votes against, not
including abstentions or broker non-votes.
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12. Top trends in the US
Say on Pay continued
ISS has an impact, but is not decisive
– ISS has recommended a vote against SOP on about 12% of companies
– Of the 733 votes taken where ISS has made a recommendation:
All with a Pass recommendation passed
78 of 95 with a Fail recommendation passed (only 17 failed)
– ISS does sway institutional voters:
Average “For” Votes
Votes %
All Proposals 91%
Proposals with ISS
94%
“For” Recommendation
Proposals with ISS
69%
“Against” Recommendation
Source: ISS. Based on companies in Russell 3000. As of May 13.
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13. Top trends in the US
Other Dodd-Frank issues
Tentative SEC Timeline for Dodd-Frank Implementation
Topic Proposed Rules Adopt Rules
Compensation committee, adviser Issued March 30, 2011 Final SEC rules expected
independence: Listing standards Aug. – Dec. 2011
Final stock exchange
rules expected second
half of 2012
Compensation consultant conflicts: Issued March 30, 2011 Final SEC rules expected
Disclosure Aug. – Dec. 2011
Clawback policies Aug. – Dec. 2011 Aug. – Dec. 2011
Disclosure on pay for performance, Aug. – Dec. 2011 Aug. – Dec. 2011
internal pay equity* and hedging
policies
* House sub-Committee has voted to rescind this provision
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14. Top trends in Canada
Short-term incentives
Almost 2/3 of companies surveyed in late 2010 expected to pay out around or
above target for 2010 performance
Payout will be at
maximum, 2% Uncertain, 5%
Payout above target, No payout, 5%
20%
Payout below target,
25%
Payout around
target, 44%
We expect this trend to continue in 2011, given the economic recovery in Canada
We expect this trend to continue in 2011, given the economic recovery in Canada
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15. Top trends in Canada
Long-term incentives
More companies are using performance-based LTI plans
60
50 Regular Stock
Options
40
Prevalence [ N = 60 ]
Performance
Share Units
30
Restricted
Share Units
20
10 Performance
Options
Cash Long-term Incentive Plan
0
2004 2005 2006 2007 2008 2009 2010
Movement of Current S&P/TSX 60 from 2004 - 2010
We expect this trend to continue in 2011, given the focus on paying for performance
We expect this trend to continue in 2011, given the focus on paying for performance
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16. Top trends in Canada
Say on Pay
Say on pay, while not mandatory, continues to gain momentum in Canada
As of May 13, 82 companies have adopted, or committed to adopt, a say on pay
policy, either voluntarily or as a result of shareholder proposals
2010 2011 (as of May 13)
% in Favor Number % of Total1 Number % of Total
90% - 100% 24 86% 29 81%
80% - 90% 4 14% 7 19%
Will say on pay become mandatory in Canada?
Will say on pay become mandatory in Canada?
1) Does not include companies that did not disclose voting results
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17. Top trends in Canada
Director voting
Many consider individual voting, with or without majority voting, a better
alternative to say on pay
– Currently, 145 companies have adopted majority voting
Slate Individual Majority
Voting Voting Voting
Will majority voting become a requirement in Canada?
Will majority voting become a requirement in Canada?
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18. Top trends in Canada
Pay for performance
Pay for performance is increasingly being discussed among leading Canadian
companies, raising questions such as:
What is "pay" in pay for
performance?
How can we ensure that
we are paying for Incentives? Total direct? Total
performance? remuneration? Grant date fair
value? Realized pay?
PAY FOR
PERFORMANCE
What is "performance" in
paying for performance?
How can we demonstrate to our
TSR? Financial? Balanced employees and investors that we
scorecard? Individual? Absolute are paying for performance?
or relative? Over what time
frame?
Organizations are giving more thought to what paying for performance means to them, and
Organizations are giving more thought to what paying for performance means to them, and
how they can deliver on this objective
how they can deliver on this objective
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19. Top trends in Canada
Focus on risk
Increased focus on Risk Assessment
– Already addressed by financial institutions; now being considered across other sectors
– Proposed disclosure regarding risks associated with compensation
Clawbacks
– ~1/2 of 60 largest companies have disclosed a clawback policy, although many are primarily for
SOX compliance
TRIGGERS
COVERAGE ENFORCEMENT
Fraud / misconduct?
Which elements of Tax considerations
pay? Material financial
Documentation
restatement only?
Which employees? Timing
Board discretion?
Clawback Considerations
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20. Top trends in Canada
Focus on risk
Share Retention Policies
– ~1/4 of 60 largest companies have disclosed share retention requirements
Considerations
Who CEO? CFO? NEOs?
Triggers Vesting / exercise of LTIs?
Departure from company?
Amounts Multiple of salary?
Timeframe Only until stock ownership guidelines are met?
1-2 years post departure?
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22. Top trends in Europe
Hot topics
Salary freezes and salary cuts are being replaced by modest wage growth in most European markets
Increases range from 2 to 3% in Western Europe and 5 to 6% in Eastern Europe for 2010, and are
forecasted to be the same for 2011
Companies are increasing their focus on managing the risk of their incentive plans
Increasing use of bonus clawbacks and deferrals (particularly where bonus potentials have increased)
Increasing pressures to demonstrate strong link between pay and performance is likely to continue as
long as economic uncertainty persists
For the UK, 2011 is being dominated by governmental pressure on financial services companies
Changing remuneration philosophies
More companies are repositioning pay at the median, instead of the upper quartile, and using more
targeted industry-specific peer groups in the war for talented executives
Transparency and disclosure continues to increase, while board oversight is becoming more robust
Many controversial executive pay practices have disappeared or been drastically reduced, for example
perquisites and severance packages
– Common practice in the UK has traditionally been 1-year severance pay and this trend is now
spreading across the rest of Europe
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23. Top trends in Europe
Short-term incentive payouts
Target bonus levels have remained fairly stable over the past two years at an
average of 50 to 80%
Actual payouts versus target levels have decreased by an average of 14% across
Europe from 2009 to 2010*
120% 2009
2010
102% 100%
99% 98%
100%
91% 92% 92%
87% 87%
% of target actually paid
82%
80% 75%
67%
60%
40%
20%
0%
UK Germ any France Italy Netherlands Spain
Mercer * Based on Mercer analysis in France, Germany, Italy, Netherlands, Spain and the UK 22
24. Top trends in Europe
Short-term incentive design
Growing interest in deferred bonus plans (increased from 45% of companies in 2009
to 67% in 2010)
Country Overall trend
The percentage of organisations reporting deferral of cash
Germany, Italy, and
compensation for executives is significantly higher in 2010, compared
Switzerland
to 2009
Deferral plans now apply to almost 50% of executives
United Kingdom Of these, 50% have a clawback structure and a similar proportion have
a Malus arrangement
Belgium and Ireland Not yet typical market practice
Increasing use of clawback structures where bonus deferrals operate
– Some organisations also operate a Malus arrangement, where bonus does not vest immediately
and can be reduced if performance indicators fall in future years
Reviewing short-term performance measures
– We are seeing a wider range of financial measures, sometimes used in combination – a
scorecard approach
– For example, organisations are moving away from a pure focus on profit and are using measures
such as cash flow and EBITDA
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25. Top trends in Europe
Long-term incentive plan prevalence
Moving away from stock options; increasing use of long-term cash plans
– We have seen a fall in the use of share options from 33% to 25% on average across Europe and an
increase by almost 50% in the use of long-term cash plans
60% 2009
53%
2010
50%
50%
% of companies with plan in place
40%
33%
30% 28%
25%
19%
20%
15%
13%
10%
0%
Stock Options Performance Shares Restricted Stock Long-term cash
– Market intelligence suggests this trend is likely to continue, with performance shares becoming more
popular than share options across Europe
This is already the case in the UK with 89% of FTSE100 companies using performance share
plans and just 56% using share option plans
Mercer * Based on Mercer analysis in France, Germany, Italy, Netherlands, Spain and the UK 24
26. Top trends in Europe
UK “Say on pay”
“Say on pay” is well established in the UK and the relationship between boards of
directors and their shareholders has grown particularly strong over the past few
years
– Dialogue has increased due to better communication arrangements
– Shareholding bodies now have a better understanding of the differentiation between companies
and consequently appreciate that what might work for one company may not work for another
Since 2004, the number of blue tops has increased, as has the number of red
tops. However, the number of amber tops has declined*
100%
80% Red top: Matter of serious
68% 68% concern; breach of
62% 63% 64%
60% guidelines
% companies
60% Amber top: Issue for
shareholder judgement
40% 30% Blue top: No areas for
28% 27% 26%
22% major concern
20%
20% 10% 10% 10% 10% 10% 12%
0%
2004 2005 2006 2007 2008 2009
Mercer * Source: Ivis Reviews 2004 - 2009 25
28. Top trends in Asia Pacific
Pay levels
Asian executive salaries could surpass those of the US
within next two to three years
Moderate increases in Australia and Japan
Record increases in executive pay in China, India, Indonesia, Vietnam,
Philippines and Malaysia due to rapid growth in industrial production and
GDP, leadership shortages and inflation.
In some countries, e.g. India, there is starting to emerge greater shareholder
‘impatience’ with increased executive compensation at companies who do not deliver
expected performance.
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29. Top trends in Asia Pacific
Pay for performance
Companies are taking a “re-look” at performance metrics, with a lengthening of vesting
periods and incentive compensation constituting an increased proportion of the mix of
pay
Australia Changes to the tax legislation have driven a move from options to performance rights
or performance shares
Greater China, Options remain most prevalent vehicle, but restricted- and performance-share
India and Japan programs increasingly being adopted
Korea Performance shares very common, especially in the banking sector
India Extension of equity compensation deeper into the organization, to mid-management
levels, especially at smaller organizations
Grants are often dependent on performance hurdles having been met
Singapore Full value share awards as common as options, with performance programs becoming
the norm, often tied to a value creation metric
Attempts to design incentive programs that mitigate pre-payment risk
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30. Top trends in Asia Pacific
Governance
Remuneration committees are increasingly focusing on receiving objective advice and
are more sensitive to shareholders’ reception of remuneration plans
Australia Proposed amendments to Corporations Act impacting disclosure, board member re-
election and appointment of advisors
Committees are reviewing and assessing executive compensation frameworks to
ensure linkage to market, business strategy and financial performance
Japan No significant reaction to new disclosure rules on total remuneration of individual
executives in excess of JPY 100 million
India Convergence towards IFRS-2 on expensing of stock compensation being finalized
Mercer 29
32. The changing face of executive compensation
A global convergence of trends
Worldwide pressures
Supply and demand
Heightened scrutiny
Pay for performance
Pay levels
Clawbacks
Transparency
Mercer 31
34. Questions and contacts
Questions
Will Ferguson, Los Angeles, moderator Please type your questions in the Q&A section of the toolbar
+1 213 346 2240 and we will do our best to answer as many questions as we
will.ferguson@mercer.com have time for.
To submit a question while in full screen mode, use the Q&A
Mark Hoble, London button on the bottom right-hand side of your screen.
+44 20 7178 5725
mark.hoble@mercer.com To submit a question while in half screen mode, use the Q&A
panel on the bottom right-hand side of your screen.
Hans Kothuis, Hong Kong
CLICK HERE TO ASK A QUESTION
+852 3476 3817 TO “ALL PANELISTS”
hans.kothuis@mercer.com
Feedback
Gregg Passin, New York Please take the time to fill out the feedback form at the end of
+1 212 345 1009 this web briefing so we can continue to improve. The feedback
gregg.passin@mercer.com form will pop-up in a new window when the session ends.
Lisa Slipp, Toronto
+1 416 868 7665 www.mercer.com/webcasts
View past recordings and sign up for upcoming webcasts
lisa.slipp@mercer.com
For global insight into executive remuneration trends, visit
www.mercer.com/perspective
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