When executives have a tough
time meeting their performance goals, a growing number of companies are
moving the goalposts for them.
Instead of paying bonuses to
top executives when revenue or profits rise — less and less likely in this
dark economy — companies have disclosed plans to offer awards based on
other measures of success. A bonus may be more attainable if based, say,
on preserving cash flow.
Xerox has dropped revenue growth as a factor in determining bonuses
for its executives, the company disclosed recently in
regulatory filings. The company will rely instead mostly on cash flow
and secondarily on earnings per share.
“In this unstable economy
it is critical that we focus on cash generation and earnings,” said Carl
Langsenkamp, a Xerox spokesman, in an e-mail message. “So as the economy
shifts, there are times that we reset priorities.”
Under the old system,
which included revenue growth, Xerox’s chief executive,
Anne M. Mulcahy, got a bonus of $990,000 for 2008, less than half of
the $2.2 million she received a year earlier. Other top executives saw
similar reductions in their bonus awards, according to Xerox’s
But changes like these
raise concerns among institutional investors who worry that companies may
be looking for ways to pay bonuses regardless of performance.
“What makes a lot of
investors anxious is, not only is it changing, but it could allow for
gaming of these incentive programs,” said Michael McCauley, corporate
governance officer at the
Florida State Board of Administration, the investment manager for the
state’s pension plan. “You just kind of have to do some analysis of why
that change was made,” and whether it is an incentive that benefits
investors, he continued. “Is the actual change a good one?”
Companies generally point
to the economic downturn and argue that this year, missing the kind of
performance targets used in the past does not result from poor management.
It would be unfair to withhold pay from executives, in this view, because
they may be doing a good job while circumstances beyond their control
sabotage their efforts.
Barnes Group, a manufacturing and logistics company, said in its
filings that its bonuses would take into account the working capital
of the company and each of its segments, alongside earnings per share.
“It was kind of just a way
to focus the organization,” said Brian D. Koppy, director of investor
relations and communications at Barnes. “If you focus on cash in a down
environment, that is better for the sustainability of the business in the
If the idea had been to
make it easier for executives to earn bonuses, Mr. Koppy added, the
company could simply have lowered its earnings target.
Determining how many
companies are adjusting the terms of their executive bonus plans is not
easy. Sometimes the changes are disclosed in proxies, but not always. A
systematic comparison of disclosures in proxies is time-consuming; bonus
terms are not always reduced to easily searched charts or tables.
“The disclosures we’re
highlighting were very far and few between in past years,” said Alexander
Cwirko-Godycki, research manager at Equilar, which identified several
modified bonus plans for The Times. “It’s safe to say that this crisis
environment, whatever you want to call it, is forcing companies to try to
make these changes.”
controversially, some companies adjusted performance goals on the fly in
2008, generally making it easier to earn bonuses. In October, the board of
Comsys IT Partners, an information technology consulting company,
approved cutting the earnings target that the company had to meet in
the last six months of 2008 for its executives to get a bonus.
The compensation committee
at Comsys justified the reduction by bluntly stating that the original
2008 goal “was unattainable” for earnings before interest, taxes,
depreciation and amortization. The company also reduced the size of
bonuses that top executives could receive.
Filings show that Larry L. Enterline, the company’s chief executive,
received a bonus of $187,500 for his performance in 2008, down from
$562,500 a year earlier. Similar declines were reported for other top
officials at Comsys did not return calls seeking comment.
Consultants who specialize
executive pay say that changes to bonus programs are not necessarily
against the interests of shareholders, who benefit from keeping and
motivating talented managers. Allowing a company to reset performance
goals during the year, providing more opportunities to react to the
changing economy, may make sense.
“There’s a feeling that
judgment should be used,” said James F. Reda, founder and managing
director of James F. Reda & Associates, a compensation consulting firm.
“That’s what we’re seeing.”
One way to ensure that
hard-working executives get the bonuses they deserve is to include a
relative measure of performance that compares results with those of
competitors. That helps mitigate the effects of a declining economy, since
all the companies in a particular business would face similar pressures,
said Mr. McCauley of the Florida State Board of Administration.
Using more factors to set
bonuses also helps, he said, because rarely does one measure of
performance capture everything.
“What investors really
want to see is that they’re stretch goals — they’re not necessarily easily
attainable,” Mr. McCauley said.
Reasonable people may
differ on what best reveals the quality of an executive’s work, but
putting too much emphasis on investors’ returns poses its own risks.
Shareholders may not always be best served by strategies to increase
earnings at any cost. Remember the pressure to inflate numbers at
Enron, way, way back in 2001.
conditions may alter everything from the executive skills needed to the
bonus measurements, remarked Brian T. Foley, managing director of Brian
Foley & Company, a compensation consulting firm in White Plains, in an
e-mail message. “But the underlying pay-for-actual-performance dynamic
still must be clear, significant and readily defensible.”