The recent downward trend in corporate compensation is creating the need for companies to develop new incentive program designs that help sustain employee motivation and improve overall corporate performance, according to a new report published by Watson Wyatt Worldwide, a consulting firm.

Watson Wyatt research shows that compensation for top corporate management has fallen for the past three years following 20 years of steady increases. The report predicts that pay levels will continue to fall not only for executives, but also for the broader corporate population, particularly as more companies stop using stock options.

"Stock options and other incentive pay-based tools that tie individual and company performance have been the heart of America's global competitive advantage for many years," says Ira Kay, national director of compensation consulting at Watson Wyatt. "They have created enormous value for companies and for the overall economy, even while factoring in the recent stock market correction. But the heavy reliance on stock options is beginning to shift."

Indeed, the Watson Wyatt report cites a significant decline in the use of stock options as one of several factors that will place downward pressure on future pay levels.

"Stock options are the most leveraged of any corporate compensation program. If future stock market appreciation is in single digits as many experts believe, future pay levels will also be lower than historical levels, given the smaller grants and lower appreciation," says Kay.

Other reasons cited in the report that will lead to reduced corporate compensation levels:

• Increasing demand from institutional investors for more shareholder-friendly compensation programs,
  
• Companies pushing for more employee stock ownership programs,
  
• Continuing softness in the labor market putting employers more in control of pay levels than previously,
  
• The probable change in the accounting rules for stock options.

"As options play a reduced role in compensation packages, companies will need to ensure that they maintain a program of sufficient incentives to encourage and acknowledge progress," said Kay. "When the labor market tightens again, companies will need to be ready with new compensation strategies that maintain competitive advantages and continue to attract and retain the best employees."

A summary of the report, Changing the Way America Gets Paid, is available at www.watsonwyatt.com.