After two consecutive years of dwindling compensation, executive pay at large- and mid-size U.S. companies is expected to rebound modestly this year, according to a new survey by Towers Watson. However, unlike the pre-crisis environment where executives received bonuses regardless of performance, they are now expected to earn their bread.

Almost half (49%) of the 251 companies polled expect to increase funding for annual bonuses for executives this year, while one-third either have made or expect to make larger long-term incentive grants (dollar-wise) this year versus last year. However, a majority of companies remain cautious about spending, with 53% increasing bonus funding expecting relatively modest increases of 20% or less. More than two-thirds (69%) of the companies making larger long-term incentive grants said the dollar value of their grants will increase by 20% or less.

“For many companies, the economic recovery brings improved financial performance and greater flexibility to pay larger annual bonuses and long-term incentives grants,” says Doug Friske, head of executive compensation consulting at Towers Watson. “However, the survey findings also reflect the unevenness of the recovery and underscore the fact that many companies continue to struggle to regain momentum in a challenging environment.”

Dialing it in
The survey found that companies plan to fine tune their executive pay programs—particularly their incentive plans—in the wake of continuing pressure to better align their programs with business performance. Nearly two-thirds of respondents (66%) reported making some change to their annual incentive programs this year, while 54% made or expect to make revisions to their long-term incentive plans. The most common revisions made to incentive plans were to change performance metrics or increase performance goals, while the most common shift among performance metrics was to place greater emphasis on profit measures and revenue growth.

“Clearly, most companies are taking a thoughtful and cautious approach rather than making wholesale changes to their executive pay programs,” says Andy Goldstein, leader of Towers Watson’s executive compensation practice in the central region of the U.S. “In fact, most of the changes we are seeing are consistent with compensation committees’ continuing focus on pay for performance as well as on mitigating compensation risk and their growing need to exercise greater discretion to ensure appropriate pay results.”