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CEO Bonus Has `Catch' as Targets Prevail, Hewitt Says

Chief executive officers in the U.S. are getting bigger long-term incentive awards and more firms are tying those payouts to performance goals, a survey shows.

More companies are linking future stock and cash bonuses to specific targets, according to a study of 157 companies in the Fortune 250 released today by Hewitt Associates Inc., a Lincolnshire, Illinois-based human resources consultant. Thirty- five percent of companies in the Fortune 250 had performance plans in place in 2009 compared with 18 percent in 2003.

“Boards aren’t going back to business as usual,” said David Hofrichter, principal and business development leader of Hewitt’s executive compensation consulting practice. “They’re saying there’s a catch here and you’re going to have to cross these hurdles first.”

The total median value of long-term incentives, which include stock options, restricted stock grants and performance awards, increased 23 percent in 2010 from a year earlier, Hewitt said. The market recovery means companies can hand out fewer shares to meet promised bonuses, Hofrichter said. The Standard & Poor’s 500 Index rose 23 percent in 2009 and is up 1.1 percent this year.

A separate analysis by Graef Crystal, a pay expert based in Las Vegas, found that option awards for CEOs of 307 companies in the S&P 500 on average were slashed 17 percent in 2009 and stock awards fell 18 percent. With excessive pay packages under pressure from President Barack Obama, lawmakers and shareholder activists, average annual compensation fell 9.3 percent to $10.2 million in 2009, Crystal said. The median total pay package declined 0.2 percent.

Public Scrutiny

The financial regulation bill, which was signed by Obama on July 21 and includes provisions about executive compensation, as well as public scrutiny over pay have made company boards feel it’s necessary to link compensation with performance targets, said Hewitt’s Hofrichter.

“Directors are feeling that they need to answer the question, ‘Is this a good deal,’ and look shareholders in the face and explain why they did what they did,” Hofrichter said.

Performance plans, which usually set absolute number targets related to future growth, earnings and shareholder return, may be as much as 40 percent of long-term incentive packages, according to Hofrichter.

Forty percent of packages now may be in stock options and 20 percent in restricted stock, which has become less popular, Hewitt said. The breakdown of how CEOs are awarded for meeting performance goals is evenly split between cash and equity, said Hofrichter.

‘Freebies’

“The days of pure time-vested stocks options and restricted stock are over,” said Frank Glassner, CEO of San Francisco-based Veritas Executive Compensation Consultants LLC. “They’re being viewed as freebies.”

The design and payout structure of executive pay is also more important than the actual amount, Glassner said.

Hewitt’s findings were based on an analysis of filings with the Securities and Exchange Commission. The companies surveyed include those in the financial, consumer, energy, industrial and health-care industries. Hewitt declined to provide specific names of companies in the study because of client confidentiality agreements.

Performance-Based Bonuses

One Fortune 250 company, News Corp., owner of the Wall Street Journal, shifted compensation for top executives to more performance-based bonuses tied to financial and operating goals, the New York-based company said Aug. 3 in a regulatory filing.

A separate survey of 1,046 U.S. companies released yesterday by Towers Watson & Co., the benefits consultant based in New York, found that firms are planning larger pay increases for 2011. Workers who have average performance ratings this year will receive a median increase of 2.6 percent while employees who have the highest performance will receive 4.3 percent more.

To contact the reporter on this story: Alexis Leondis in New York aleondis@bloomberg.net.

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