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July 29, 2004
The Future of Executive Compensation

Legal Editor, Business and Legal Reports

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We've read about scandal after scandal-Tyco, Enron, ImClone, WorldCom, Global Crossing. So what does this mean for the future of executive compensation? Will compensation packages continue to increase or will we see a reigning in of salaries, bonuses, stock options, and perquisites for executives? Ezra Singer and Robert Romanchek of Hewitt Associates recently offered their expert opinions on the matter at WorldatWork's 49th Annual Conference and Exhibition in Boston.

Interestingly enough, Singer and Romanchek maintain that the state of the economy today is very similar to that of the period between 1935 and 1954. At the end of the 1930's, we were in a period of economic recovery after suffering through the depression. We witnessed increasing tax rates and inflation near zero, but beginning to rise. World War II created a boom in the economy-gross national product rose 75%, unemployment decreased, and high pay premiums were used to recruit executives.

Between 1935 and 1954, we also experienced an increase in executive compensation, while tax-deferred options were increasingly popular. These included restricted stock options, split-dollar life insurance, deferred compensation, and pension plans. Singer and Romanchek believe we are in a very similar economic period now, despite the fact that the war in Iraq has not resulted in the level of economic growth caused by World War II.

As the rate of inflation grows, Romanchek and Singer believe we may witness an increase in executive salaries; meanwhile new legislation will likely pass that makes stock options more appealing, tightens allowable investments on nonqualified deferrals, and makes life insurance a benefit for all employees, rather than just executives.

Beyond this, Singer and Romanchek predict that outside director compensation will increase, but that companies will pay fewer "meeting fees" and instead provide base salaries. Outside directors will have to put in greater effort for their compensation. In addition, as taxes increase, we will likely see a growing number of options which allow executives to defer their compensation, such as life insurance, nonqualified deferred compensation plans, and stock vehicles.

What about executive perquisites? BLR's 2004 Survey of Executive Compensation reports that automobile use and health club memberships overall have increased in 2004, while corporate airplane use is generally down, and the use of limousine services by executives showed both increases and decreases depending upon the executive position.

Over the past several years, the types of perquisites provided to executives have changed, as well as their overall level of importance in the executive pay package. Many corporations today are concerned with the exaggerated appearance of privilege that perquisites can create. For example, separate dining rooms for executives, use of the corporate jet, or frequent limousine use can make lower level employees feel that that the executives believe they are "above" the other employees.

Instead, there has been a general trend toward perquisites such as cell phones, automobile use, home computers, calling plans, and club memberships that are less obvious, but assist the executive in carrying out his or her job functions with greater efficiency and ease, while maintaining a better level of overall health.

One thing is clear: The corporate fraud scandals of the last several years have set the stage for future executive compensation pay programs, at least for a few years anyway while the scandals are still fresh in our minds.

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