Large companies, particularly those in the midst of a turnaround, must retain competitive executive compensation packages in order to stay in the game, experts on the subject maintain.

Some are questioning recent moves by General Motors Corp. and Ford Motor Co., both of which posted losses in the billions last year, to reward their top executives with stock options and salary increases.

While the auto makers continue to struggle in North America and are shedding thousands of workers, their executive-compensation committees had no choice but to raise top officers’ pay, says Russell Miller, managing director-Executive Compensation Advisors.

“Those companies need to have executives in place to turn the companies around, and they’re competing for the same talent as more healthy companies,” he says. “So the challenge is, how do (companies) in those situations compete for executive talent? It’s tricky.

“Typically what you find is companies that say, ‘We’re not going to reward you for the hand you were dealt, but for how you play your hand.’”

GM on March 6 restored Chairman and CEO Rick Wagoner’s salary to its 2003 level of $2.2 million. Wagoner voluntarily reduced his annual base pay 50% in 2006 to $1.1 million, after the auto maker announced its turnaround plan, which included job cuts and production reductions.

Between 2008 and 2010, Wagoner also will be eligible to receive up to 110,376 shares of common GM stock, an additional 250,000 units in stock options and 60,000 units with certain restrictions, a filing with the Securities and Exchange Commission says.

Other GM executives have received raises and stock options, as well.

Ford on March 7 rewarded its top executives with 2 million shares valued at about $15 million and options totaling more than 6 million stock options, an SEC filing reveals.

President and CEO Alan Mulally was given 715,230 shares valued at $4 million, as well as an option to buy an additional 3.6 million shares.

Brian Tobin, a senior consultant for Hay Group’s Executive Compensation Practice, agrees companies must offer competitive compensation. If not, they run the risk of “market drift.”

“You can’t ignore what the industry pays, or else you may have more hurdles with respect to recruiting and retaining (executives),” he says. “(Executives) are charged with coming up with business plans, and if you essentially freeze (compensation), you no longer reflect competitive practices.”

Tobin and Miller say increasing executive compensation at a time when rank-and-file workers are being asked to make sacrifices is a delicate situation, especially for GM and Ford, where so many employees are represented by the United Auto Workers union.

UAW President Ron Gettelfinger has been outspoken in his disdain for escalating executive-compensation packages. In a speech last month, he said Detroit Big Three executives and company board members, have a moral obligation to active and retired workers who are making out-of-pocket sacrifices.

“We will not sign one-sided agreements that require our members to sacrifice, while allowing employers to enjoy record profits and executives to be paid obscenely, extravagant salaries and bonuses,” Gettelfinger said.

Calls to the UAW seeking comment were not returned.

Although it may appear executive compensation levels are rising rapidly, the data indicates otherwise, Miller says, noting pay levels continue a modest growth pace of no more than 5% annually.

“Nothing dramatic up or down,” he says. “We’re seeing a stabilized market for executive compensation.”

There are changes afoot, however. As evidenced in the recent GM and Ford moves, companies increasingly are granting stock options to their executives in lieu of cash bonuses or salary increases, Miller says.

“The question in a turnaround is, what’s going to motivate executives more, shares of restricted stock or options that give them the ability to share in the rebound of stock prices – if they can make it rebound?”

A study by Towers Perrin, a global professional-services firm, says award practices are shifting, and the issuance of stock options as compensation will be restricted to only the highest-level executives.

“For the same dollar cost to the company, other forms of compensation tend to be more suited to lower-level individuals, such as annual bonuses and restricted stock,” the firm’s study says.

Depending on the company’s objectives, the study found such awards have a better connection to what individuals can control and also may be perceived by recipients as more valuable “because they offer greater liquidity and less apparent risk.”

Performance shares and units will be “more common and become a more significant portion of the pay mix for most executives,” the Towers Perrin study concludes.