For example,
remixing the grant towards stock options to take advantage of what may
be a low stock price should not by itself be viewed as an appropriate
rationale for adjusting the mix, particularly amid concerns of stock
option backdating. Further, the negative leverage drawback of options
could be compounded if the markets experience further declines.

Also
consider that any actions taken for 2009 grants will need appropriate
disclosure in the CD&A (compensation discussion and analysis).

We recommend reviewing a draft disclosure of the rationale before making final decisions.

Companies
will be busy evaluating executive remuneration strategies for 2009. We
offer a list of areas for developing the 2009 agenda.

•
Alignment of programme to business strategy: Ensure the compensation
programme reflects adjustments that may be made to business strategy.

•
Balance of incentives for short-term, mid-term and long-term
performance: Market volatility invites a discussion of whether the plan
appropriately rewards a balance of performance time horizons.

•
Long-term incentive vehicles: Examine the appropriate role of options,
performance awards, and restricted stock and cash-based plans.

•
Performance measurement and target setting: Forecasting may be more
uncertain in this environment. Companies should examine measure
selection; goal setting and the range of performance corresponding to
payouts; and the use of relative versus absolute measures.

•
Business risk implications: Recent regulation has invited scrutiny of
whether compensation plans within financial services organizations led
to inappropriate risk-taking; 2009 is a good time to test.

•
Global compensation strategy: Declining equity markets and currency
fluctuations invite review of global compensation strategies to ensure
appropriate alignment.

• Executive retention and wealth
accumulation: Declining markets have left options underwater and equity
programmes with much lower value. Assessing the impact on key talent
and developing an appropriate strategy are critical.

• Stock
ownership rules and holding requirements: Declining markets have
impacted executive and director ownership guideline compliance. In some
cases, shareholders have expressed concern about the timing of
management award payouts, when share price declined and they suffered
losses. This needs appropriate alignment.

• Equity strategy
for director compensation: As with executives, there is a need to
calibrate director compensation equity with falling share prices.

•
Shareholder engagement strategy: Companies may find they need to seek
shareholder approval of additional equity reserves sooner than
expected, or undertake actions that may be at odds with shareholder
policies that were adopted prior to the current market decline.
Assessing how best to have a dialogue with shareholders will be an
important consideration.

• Hot buttons for external
shareholders: Executive severance, change in control, pension benefits
and other executive perquisites are programme areas that have been the
focal points for shareholders over the past several years. In a down
market, the level of scrutiny on these increases.

Option
exchanges, including repricings and cash-outs, are intended to meet a
range of objectives: bridging the gap between accounting expense and
value delivered to employees, restoring the retention value in
outstanding equity awards and reducing overhang. Option exchanges are
not feasible in all geographies because of regulatory constraints. In
the US, they usually require shareholder approval and most companies
exclude their named executive officers from the programme.

One
thing we learnt from option repricings during the dot-com decline
earlier this decade is that many companies act too quickly.

Options
are intended to reward long-term performance and shareholders expect
the stock price to be down for an extended period of time before
companies try to correct the situation.

Given the current
volatility, we suggest companies postpone consideration of exchanges
until the market is more stable. At that point, value-for-value
exchanges might be appropriate for underwater options held by employees
below the senior executive level.

Another alternative is to
exchange options for restricted stock, performance shares or cash
incentives. So, while the same cautions apply, the range of solutions
is broader than that during the last downturn. Companies are assessing
how to respond to the volatile environment just in time, and the
calculus is constantly shifting.

With market tumult comes
opportunity. In this game-changing environment, companies have a unique
opportunity to determine how best to configure their executive rewards
and talent management strategies to align with key business objectives.

Much
like the paradigm shift that occurred earlier in this decade with the
fall of Enron, the adoption of the Sarbanes-Oxley Act and expensing of
stock options, 2009 will see a dramatic rethinking of approaches to
executive remuneration. With appropriate planning, this process will
lead to more effective ways for companies to attract, retain and
motivate executive teams, link pay to performance and align programmes
with shareholder interests.