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Mercer: Boards increase scrutiny of execs’ exit plans

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Nearly seven in 10 boards of directors (69 percent) are overseeing the development and implementation of succession plans for their company executives, up from 53 percent in 2013, according to new research.

Mercer, a subsidiary of Marsh & McLennan Companies, discloses these findings in a 2013 year-end report on executive rewards. Based on responses from 215 North American companies representing more than 20 industry sectors, the survey examines how companies are managing executive rewards given the current economic outlook, regulatory environment and the views of risk-averse institutional investors and boards of directors.

The report reveals that improvement in company performance relative to the prior year remains the predominant goal-setting methodology (among 48 percent of respondents) for executives’ annual incentive plans. Fewer survey respondents base such plans on historical performance (42 percent), peer company comparison (26 percent), shareholder expectations (22 percent) or other methodologies (32 percent).

For those making changes to executive performance measures, 65 percent respondents plan to increase the weighting of corporate/financial measures. Smaller percentages of the companies polled intend to increase the weighting of the following:

  • Corporate/non-financial measures – 25 percent;
  • Business unit/division (financial) measures – 42 percent;
  • Business unit/division (non-financial) measures – 42 percent;
  • Individual measures – 34 percent;
  • Use of discretion below the named executive officer (NEO) level – 5 percent; and
  • Other measures – 17 percent.

“We continue to see earnings and revenue-based measures as most prominent in annual incentive plans, and stock price being the most common measure for long-term incentive plans,” the report states. “Where share price (return) was used in long-term incentive plans, measures were most commonly identified as being based on performance relative to peers.

“This year’s survey results suggest a decrease in the level of discretion applied in award determination.”

Turning to long-term incentives (LTIs), the survey indicates that options and performance-based units (stock) are the most prominent LTI vehicles. More than six in 10 of the surveyed companies award these vehicles to, respectively, CEOs (65 percent options; 63 percent PSUs) and other named executive officers (67 percent options, 63 percent PSUs.)

Less frequently awarded by the companies are restricted stock units (RSUs), performance-based cash and deferred cash. Among CEOs, the percentages are as follows:

  • Restricted stock – 57 percent;
  • Performance-based cash – 22 percent; and
  • Deferred cash – 14 percent.

Among other named executives officers (NEOs), the percentage breakdown is:

  • Restricted stock – 57 percent;
  • Performance-based cash – 22 percent; and
  • Deferred cash – 15 percent.

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