Survey: Currency exchange rates wreak havoc on bonuses

Dive Brief:

A new Towers Watson survey of more than 100 U.S. multinational organizations shows roughly one in four companies adjusted their executive incentive plans this year to neutralize the impact of currency fluctuations on bonuses.
The situation for many U.S. companies went from bad to worse early this year as the dollar rose to new heights. The survey found that about half the companies that did not adjust for currency movements in 2014 are reconsidering their approach for this year.
Some of those reconsidering have switched to explicitly planning to neutralize the impact of currencies. But the majority of those reporting a change for 2015 are taking a wait-and-see approach, anticipating that the compensation committee will assess the situation at the end of the year and exercise discretion as necessary.

Dive Insight:

Like any issue that potentially disrupts how companies typically meet goals, the questions raised by significant currency fluctuations merit careful consideration, according to Towers Watson. Some companies are more likely to be affected by currency volatility than others, and the right answer for one might not be right for another.

For example, as the survey found, companies have two primary alternatives to consider: making no adjustment for currency fluctuations or holding currencies constant. These choices reflect an underlying philosophical question: to what extent should management be held accountable for factors outside its control? Both approaches can work, says the Towers Watson article.

Other options are discussed, but the bottom line is whatever policy an employer chooses, it must be applied consistently. The article also notes that committees and management will want to take into account all relevant considerations at the end of the year in applying judgment to bonus decisions. At the same time, it’s better for shareholders and plan participants alike if employers anticipate that certain facts, such as currencies, will change and decide in advance how they will respond to those circumstances.