Executive compensation at large and mid-sized U.S. companies is expected to rebound modestly this year after two consecutive years of declines as business conditions improve, according to a survey.

However, most companies continue to remain cautious about spending and are likely to tighten the link between pay and performance, the survey conducted by human resources consultancy Towers Watson Co showed.

The findings reflect the unevenness of the recovery and underscore the fact that many companies continue to struggle to regain momentum in a challenging environment, said Doug Friske, head of executive compensation consulting at Towers Watson.

Nearly half of the 251 large and mid-sized U.S. companies surveyed 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 this year versus last year.

The survey also shows only a few companies are prepared to implement 'say on pay' as required by a recent financial services legislation, Towers Watson said.

Some firms are stepping up communication with institutional investors and proxy advisers to address this issue and win their support, the survey said.

'Say on pay' is a corporate governance reform long sought by investor advocates that would give shareholders more influence in setting corporate managers' pay packages. Recent rules call for this policy to be implemented in time for 2011 proxy season.

Companies are also concerned and paying more attention toward executive retention -- only one in 10 respondents said executive retention is not an issue for them.

(Reporting by A.Ananthalakshmi in Bangalore; Editing by Gopakumar Warrier)