Companies risk losing their most recession-experienced executives at just the point they most need them, according to Watson Wyatt.
The firm says that current pressures could drive many of the UK’s most experienced executives out of the boardroom and into retirement.
With 31 per cent of FTSE100 chief executives and 27 per cent of FTSE100 executive directors over age 55, if executives see no prospect of payout from their incentive plans for several years, many may opt for either for early retirement or other, less frenetic careers.
“The economic world has changed enormously in the last few months and even companies with sound business prospects face a long, hard haul back to where their share price was in 2007,” said Sue Bartlett, a senior reward consultant at Watson Wyatt.
“The prospect facing executives is of several years of working much harder for far less reward. Some of the most ‘recession-tested’ and experienced hands may be tempted to call it a day just when shareholders need them most. Companies need to think carefully how to avoid this affecting their ability to recover quickly.
“Shareholders have suffered but it should be remembered that many executives have a large part of their personal wealth invested in shares in their company. This is a big concentration of risk – their career, possibly their pension, their personal reputation and a big chunk of their personal savings all ride on the fortunes of the company.
“This is very different from most shareholders who are free to switch in an out of a particular share and for whom it usually represents only a small part of a portfolio or fund.
“We all agree that the interests of executives should be aligned with shareholders, that pay should be linked to performance and that avoiding ‘windfall’ payments for executives have to be top priorities.
“But unless pay packages are structured such that senior executives can see the potential reward for their efforts to steer a path through the current downturn, they may decide their best interests lie elsewhere.”
According to Watson Wyatt, many senior executives have effectively already been working for nothing over the last year.
For example, Watson Wyatt’s Executive Reward Survey 2008 finds that 42 per cent of participating companies require their chief executives to hold 200 per cent of their salary in the form of shares.
“If you are an executive with your own money tied up in shares to the value of twice your salary and you’ve seen the share price halve, you’ve effectively already been working for no salary this year” said Sue Bartlett.
“Who in this position wouldn’t start wondering if it is worth sticking around to fight through what could be a long recession?”
According to Watson Wyatt, investors and other stakeholders may have little sympathy for those working in the financial sectors closely associated with the credit crisis, but many other sectors have seen dramatic share price falls simply as a result of the gloomy economic outlook.
“Our clients tell us that for 2009 there may be base pay freezes, no bonus payouts in respect of 2008, share awards that will not vest while share ownership requirements mean that executives have lost significant amounts of their own money,” said Sue Bartlett.
“Where a company has been caught in the economic crosswind but is otherwise strong, it needs a stable management team. There is no room for underperformers but in designing executive reward packages for recessionary times, a balance needs to be struck such that the best executives are retained and motivated to produce relative strong performance.”