(The following post originally appeared on ONSecurities, a top Minnesota legal blog founded by Martin Rosenbaum to address securities, governance and compensation issues facing public companies.)
Many public companies have recently filed their proxy statements including a description of executive compensation in 2009, and we are starting to see some analyses in the media of trends in executive compensation. In an article in the St. Paul Pioneer Press on April 8, “For Target's CEO, bonuses are back”, Christopher Snowbeck reported on Target Corporation’s disclosure of its CEO’s compensation in 2009 compared to 2008. Snowbeck reported that, like many companies, Target’s executives received much higher incentive compensation in 2009 than in 2008. In fact, a number of financial services firms, such as U.S. Bancorp and TCF Financial, paid hefty bonuses in 2009, compared to no bonuses in 2008.
Snowbeck asked for my opinion on whether this shift suggested that public companies are moving toward greater emphasis on bonuses or other short term incentives. He quoted me as attributing the higher bonuses mainly to a different factor, which I called the "under-promise and over-deliver" principle:
For 2008, the year started out with high expectations, which were dashed by the end of the year. . . In 2009, compensation committees were careful to set realistic goals and [performance] targets to give executives a real incentive to turn things around, and many were able to meet or exceed more modest expectations.
By using the term "under-promise and over-deliver,” I wasn’t suggesting that executives or compensation committees are deliberately suppressing goals to boost bonuses. Instead, I just wanted to make the point that financial expectations at the beginning of the year (or other performance period) are a huge factor in ultimately determining bonuses.
In addition to the levels of incentives discussed in Snowbeck's article, there was another interesting aspect of the Target executives’ incentive compensation. Those incentives were actually based on two performance periods – for the first six months and last six months of the year. In an article in the Wall Street Journal on March 15, “Semiannual Bonuses Gain Traction”, Joann S. Lublin reported that many retail and high-tech companies have tried these semiannual bonuses, to help “. . . retain key players by dangling the carrot of two targets a year, while giving boards a chance to raise those goals quickly if economic conditions improve.” The article noted that at least 50 companies have recently disclosed plans to pay semiannual bonuses. [Note: a subscription may be required to read the entire Journal article.]
In his Advisors’ Blog (subscription required), Broc Romanek reported this feedback from his expert consultants about semiannual bonuses:
Semi-annual bonuses were adopted by a small fraction of companies due to those companies' inability (or unwillingness) to set 12 month financial targets due to the uncertainty of the economy. I've seen companies adopt the semi-annual approach and they seem to only pay the bonus when the calendar year is over. I imagine the compensation committees made sure the goals were stretch-based on the best available information at the time the goals were set. Some of these same companies retained the discretion to reduce bonuses prior to payment after taking stock of the year as a whole.
. . . This too shall pass, as compensation committees hate negotiating bonus targets two times per year (or even four times if you count the end-of-the-period negotiations on what to include - or exclude - in the final performance calculations).