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Hewitt Study Shows Long-Term Incentives In Executive Compensation Packages Are Back—but With A Catch

After being hit hard during the economic downturn, many U.S. executives are seeing the value of long-term incentive (LTI) grants rising in their 2010 compensation packages, according to an analysis by Hewitt Associates, a global human resources consulting and outsourcing company. But these rewards now come with strings attached—an increasing number of companies are tying LTIs to specific performance goals, which must be met before the grants are made to executives.

Hewitt recently conducted a detailed analysis of 2010 Form 4 Securities and Exchange Commission (SEC) filings of the Fortune 250, excluding newly hired executives. According to the analysis, the total median economic value delivered through LTI grants increased 23 percent in 2010 from 2009, nearly reversing the 20 percent drop in value that took place during the economic downturn in 2008 and 2009. As markets recovered in 2010, companies could award fewer shares through LTI grants to meet their targeted value goals. Hewitt’s analysis shows the number of shares awarded through LTI grants in 2010 fell by a median of 19 percent compared to 2009, bringing annual run rates more in line with historical norms.

“The financial crisis and resulting stock market decline of 2008 created a unique set of circumstances in executive compensation,” explained David A. Hofrichter, principal and business development leader of Hewitt’s Executive Compensation Consulting practice. “As stock prices declined, many companies were forced to reduce their LTI grants in 2008 and 2009. Companies that review 2009 proxy data will see this trend continuing. But when you analyze Form 4 data—which provides a more accurate picture of what’s really happening in the market—you’ll see that companies have started beefing up LTIs again in 2010.”

The Rise of Performance Plans

The rise in LTI value does not come without hurdles for executives, however. According to Hewitt’s research, more companies are moving away from totally unrestricted grants and establishing performance plans that require executives to hit specific business goals to pay out. Hewitt’s research shows that the prevalence of LTI performance plans has steadily increased over the past seven years, from 18 percent in 2003 to 35 percent in 2009.

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